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BP Just Beat the Rest of Big Oil to a Big Milestone

By Tyler Crowe - Nov 1, 2017 at 1:17PM

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With the announcement that it will start to buy back shares again, BP wants to show that it's in the best shape among integrated oil and gas companies.

Of all the integrated oil and gas companies, BP (BP 3.18%) was probably the last one you would have guessed would restart its share repurchase program. This past quarter, though, management said it feels comfortable enough with the company's performance that it can start to return excess capital to shareholders.

Let's take a look at BP's most recent results and see why management feels now is an opportune time to start its buyback program.

Drill ship and service vessel at sea.

Image source: Getty Images.

By the numbers

Metric Q3 2017 Q2 2017 Q3 2016
Revenue $60.81 billion $56.51 billion $48.04 billion
Net income $1.76 billion $156 million $1.58 billion
Earnings per ADS (U.S. GAAP) $0.53 $0.04 $0.51
Cash flow from operations $6.02 billion $4.89 billion $2.51 billion

Source: BP earnings release. ADS= American depository share GAAP= Generally Accepted Accounting Principles.

Here is the craziest tidbit from BP's most recent earnings report: The company's oil and gas production is 16% higher than it was this time last year, and the upstream segment wasn't even the best-performing part of the business. The real rock star for the quarter was the downstream business, which reported a 122% year-over-year increase in operating profits. 

It also helped that the company's Gulf of Mexico oil spill payments were significantly lower this past quarter. The $600 million in costs related to the Deepwater Horizon disaster was the least it has spent on that in several years. Management anticipates that it will spend a similar amount in the fourth quarter.

Given all that, BP is now generating enough cash from operations to cover all its dividend and capital expenditures with cash flow, so it wants to start buying back shares to mitigate dilution from its scrip dividend program.

BP replacement cost profit by business segment for Q3 2016, Q2 2017, and Q3 2017. Shows significant increase for the downstream business.

Source: BP earnings release. Chart by author.

The highlights

  • Overall production checked in at 2.46 million barrels of oil equivalent per day, which was 16.3% higher than this time last year. Almost all of the production gains came from six major projects that started up in 2017.
  • This quarter, three of those major projects came on stream: The Khazzan gas development in Oman, the Juniper offshore gas field in Trinidad, and Persephone in Australia. Management anticipates that its Zohr field in Egypt will start production by the end of the year.
  • BP also announced it had signed an amended development and production sharing agreement with Azerbaijan's state oil company, SOCAR, and the contracting parties. The new deal reduce's BP's interest in the field from 35.7% to 30.4%, but extends the agreement out to 2049.
  • The company also increased its working interest in two fields in the North Sea and won two licenses in the most recent Brazil offshore block auction. 
  • Also, BP officially spun off its U.S.-based midstream assets into a publicly traded master limited partnership, BP Midstream Partners (BPMP). As it stands today, the partnership owns gathering and distribution assets related to BP's Whiting refinery as well as some gathering pipelines from its offshore platforms. The parent company will own a majority stake in the partnership. 

BP Chart

BP data by YCharts

What management had to say

Here's CFO Brian Gilvary on why management feels it is in a position to start repurchasing stock again:

We have made strong progress this year in adjusting to the lower oil price environment and have now brought our finances, including the full dividend, back into organic balance at an oil price just below $50 a barrel. Given the momentum we see across our businesses and our confidence in the outlook for the group's finances, we will be recommencing a share buyback programme this quarter. We intend to offset the ongoing dilution from the scrip dividend over time.

What a Fool believes

This is a significant turning point for BP. Not only is it generating enough cash from operations at today's prices to cover its dividend and capital spending, management feels comfortable enough with its future spending plans that it can allocate some of its cash flow toward share repurchases. So far, BP is the only integrated major that has made such an announcement. 

We can probably expect those impressive production growth results to improve even further in the coming quarters as BP ramps up activity at its major new projects. Also, its signature project, the Shah Deniz Phase 2 in Azerbaijan, should come on stream in 2018. 

With all of this growth coming and its Gulf of Mexico oil spill payments significant declining, BP shares are looking more lucrative  by the day. As long as there isn't a significant decline in oil prices over the next year or so -- and that doesn't seem super likely -- then BP could be an attractive stock today. 

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Stocks Mentioned

BP p.l.c. Stock Quote
BP p.l.c.
$28.23 (3.18%) $0.87
BP Midstream Partners LP Stock Quote
BP Midstream Partners LP

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