BP PLC (LSE:BP.) confirmed bumper profits for the fourth quarter of 2022 albeit slightly shy of the City’s heightened expectations.
What’s the story?
The oil supermajor, in its fourth quarter update, confirmed record annual profits along with announcing a dividend hike and another heft equity buy-back.
It also lifted its earnings forecast out to 2030 and while retaining its “performing while transforming” corporate ESG spiel also downgraded its narrative.
BP is now guiding that it will not be reducing hydrocarbon volumes by as much as previously anticipated between now and 2030, citing a need to meet global demand in the wake of Russia’s war in Ukraine.
BP reported US$4.8bn of underlying replacement cost profits for the fourth quarter, vs consensus expectations for US$5bn, to take the annual tally to US$27.6bn eclipsing the US$12.8bn made in 2021.
The fourth quarter dividend was increased 10% to 6.6 cents per share and BP said it will buy back another US$2.75bn of shares.
Revising its medium-term guidance, BP now expects to generate some US$46bn to US$49bn of earnings by 2025, rising to US$51bn - US$56bn by 2030 (based on an assumed oil price of US$70 per barrel)
What does it mean?
BP is, as one of the world’s larger oil and gas producers, making an awful lot of money as the energy crisis brought on by Russia’s war has pushed up prices and smashed prior forecasts for the sector.
While BP is still talking decarbonisation, the direction of its walk appears to much closer to keeping a lucrative status quo in place for longer than previously stated – and, while Europe remains in fuel deficit without Russian supply we should, as consumers, perhaps be glad that voluntary supply constraint is now lower on the firm’s job list.
For shareholders, the well supported dividend and support from share buy-backs will also prove welcome in a market where most investors are looking for income and defensive portfolio stocks.
The green lobby is effectively told that higher hydrocarbon profits feed an investment strategy that is skewed towards renewables and energy transition plays (and that BP identifies gas as a transition fuel).
Lastly, talk of windfall tax payments is something a PR sideshow with US$1.8bn UK tax bill hardly breaking the oiler’s bank meanwhile the tax reliefs on new investments are a material catalyst towards the upcoming rise in CAPEX.
What does the market say?
“While the profits, dividend, buybacks and debt reductions will grab a lot of the headlines, perhaps the most interesting number in BP’s full-year results statement is capital expenditure, because the firm is nudging up its spending plans on both renewables and oil and gas,” AJ Bell investment director Russ Mould said.
“The increase in drilling and exploration work may be an acknowledgement that fossil fuels could be with us for longer than we would like or hope and also explain why oil equipment and services stocks are outperforming oil producers.
“Perhaps they are the biggest winners of all out of BP’s statement, even more than HMRC.”
What it says
"It's clearer than ever after the past three years that the world wants and needs energy that is secure and affordable as well as lower carbon - all three together, what's known as the energy trilemma,” BP chief executive Bernard Looney said in today’s statement.
“To tackle that, action is needed to accelerate the transition. And - at the same time - action is needed to make sure that the transition is orderly, so that affordable energy keeps flowing where it's needed today.
"As an integrated energy company, BP is very deliberately set up to help on both counts
Looney added: “We see tremendous opportunity to create value.”
What is next?
More of the same, basically.
BP’s upgraded financial forecasts and investment plan tell their own story, the company expects robust fuel commodity pricing to continue for the foreseeable future and it behoves the company to maintain its position as a major producer – returning strong, defensive rewards to shareholders.
The oiler will need to keep up appearances politically, so for the foreseeable future the transitional rhetoric will persist either until operational priorities shift again or until the investment pipeline begins actually to move the balance of BP’s energy mix.