Inside BP plc are two wolves: One is the green transition, the other is its status as a premier FTSE 100 income stock.
It will be hard to feed both, but following today’s first-quarter results, it is clear which wolf is getting the nourishment for now.
The British oil supermajor reported a profit of $2.3 billion attributable to shareholders in the first quarter, a significant decrease from $8.2 billion in the same period last year.
But not all figures marched lower. The dividend per share was announced at 7.27 cents, up from 6.61 cents in the first quarter of 2023, while BP also announced a $1.75 billion share buyback.
“Shareholders are unlikely to be too concerned (about the first-quarter results) given the company’s ability to return $3 billion to them via dividends and buybacks in just three months,” said AJ Bell investment director Russ Mould.
“BP is on course to return the same amount in the next three months of 2024 and if it maintains that pace for the whole year then the oil and gas major will return more than 11% of its stock market valuation to investors, a cash yield that easily exceeds Bank of England base rates, government gilt yields and inflation.”
Great news for income seekers, but dividend cover risks undercutting capital investment while shovelling even more debt onto BP’s books ($30 billion at last count, which, though $10 billion more than in 2022, is half of the $60 billion of debt on the books in 2020).
There’s one other sacrifice necessary to feed the income wolf.
“Investors who run strict screens based on environmental, social and governance (ESG) factors may be less impressed, especially as BP flags oil trading as an area of strength in the first quarter,” said Mould.
BP’s back peddling on Bernard Looney-era green policies was underscored by a recent natural gas joint venture with Abu Dhabi National Oil Company in Egypt.
Under Looney, who was ousted last September for what the board deemed “serious misconduct” with company colleagues, BP aimed to reduce its fossil fuel output by 25% by 2030 from 2019 levels.
Those plans are looking less and less likely. In February, activist European hedge fund Bluebell Capital Partners called on BP to rethink its energy-transition strategy for fear of losing market value.
Put simply, lost market value will severely hamper BP’s ability to keep shareholders on its side.
According to Mould, those Looney-era green transition plans have “been held against its shares, at least since the oil price started to recover in the wake of the pandemic as demand quickly rebounded”.
The stock trades at a discount to Shell and its major American counterparts, noted Mould.
BP’s valuation is at a point where takeover speculation has begun to circulate, adding further justification to its oil-forward strategy and current rate de-equitisation via returning cash to shareholders.
The green-transition wolf looks likely to sit this one out for now.