BP shares are up 43% in 2022 after the tragedy in Ukraine saw oil prices smash through $100 and provide oil majors such as BP with extraordinary profits.
BP experienced a huge jump in their margins as revenue surged in the second and third quarter of 2022. Margins started to decline in Q3 in line with oil prices, and this has capped BP shares.
Nonetheless, BP shares are 38% higher in 2022 and are considerably higher than 2020 lows.
The BP share price pandemic lows around 190p seem a distant memory with shares now trading at 456p. So, after such a strong rally over the past 18 months, are BP shares a buy for 2023?
BP RC Profit
To better represent the costs and profitability of holding and managing oil inventories, BP uses Underlying Replacement Cost (RC) Profit as a gauge of operating activity. BP’s Underlying RC profit surged to $22.8bn in the first nine months of 2022, compared to $8.8bn in the same period a year prior.
This reflects higher oil prices, but does not provide a full picture of BP’s finances in 2022.
BP Profit Efficiency
BP have enjoyed windfall profits as a result of external factors. Their higher operating profitability was achieved not by BP’s design, but the geopolitical landscape in Europe. To judge how efficiently these profits were generated, we’ll look at the group return on capital employed (ROCE) and compare to BP’s peers and previous periods. This measure will consider profit before interest and tax as opposed to BP’s Underlying Replacement Cost Profit.
In 2021 FY, BP had a ROCE of 7 after posting losses in 2020. This compares to Shell’s ROCE of 8.6 in 2021. This suggests Shell more efficiently regenerated profit than BP before this year’s rally in oil prices.
And BP is unlikely to improve its profitability efficiency versus its closest London-listed peer this year. The write down of their stake in Russian oil company Rosneft will hit full year profits to the tune of $25bn. The write down will reduce their asset base, but the proportion of BPs assets to profits means it will have a negative impact on their ROCE.
BP’s profit before interest and tax for the first nine months of 2022 was just $319m, compared to $13bn in the same period a year prior.
BP’s cash position
Although BP’s profit will suffer as a result of the Roseneft write down, BP’s operating cash generation has surged $10bn to $27bn in the first nine months of 2022.
This will provide significant cash for reinvestment and distributions to shareholders. This makes BP shares attractive on any weakness but the bumper returns of the last two years is unlikely to replicated next year.