BP’s profits surge, but the company’s growth is far from guaranteed

BP profits are at their highest in a decade, and it looks to be a business firing on all cylinders. But its future is far from certain, says Rupert Hargreaves.

BP logo in trees
BP plans to become a “net zero” business by 205
(Image credit: © BEN STANSALL/AFP via Getty Images)

Oil major BP reaped the rewards of a volatile energy market in the first quarter of 2022.

Supply disruptions and worries about a possible Russian oil and gas embargo sent hydrocarbon prices surging to multi-year highs, handing producers such as BP a windfall.

BP reported an average realised oil price of $50.90 per barrel for the first three months of 2022, compared to $26.84 a year ago. As a result, the business reported its highest quarterly profit in a decade.

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Underlying profit on a replacement cost basis hit $6.2bn for the first three months of the year, up 138% year-on-year and smashing analyst projections.

However, the group also booked a pre-tax charge of $24bn on its 19.75% stake in Russian oil producer Rosneft, which meant that it incurred a paper loss of $20.4bn for the quarter.

BP pushes forward with growth as cash flow booms

Despite the Rosneft writedown, which everyone knew was coming, BP’s report was full of good news for investors.

Strong cash generation means the company is both able to reduce debt and invest heavily in managing its transition towards “greener” energy. Net debt fell to $27.5bn at the end of March, down from $30.6bn at the end of 2021 and $38.9bn at the end of 2020.

Capital spending during the period totalled around $3bn, with just under $1bn going on gas and low-carbon energy projects. BP made several deals to advance its position in wind power throughout the quarter, including a ScotWind lease option award of 1.45GW net. It also pushed ahead with its hydrogen strategy, announcing plans to develop H2-Fifty, a 250MW gross green hydrogen plant in Rotterdam.

BP expects to spend $14bn to $15bn on capital projects in 2022. This will partly be funded through asset sales, which raised around $1.2bn this quarter and are expected to total as much as $3bn for the year as a whole.

Shareholders are also set for bumper returns. During 2022, BP plans to return 60% of surplus cash flow via share buybacks, with the other 40% dedicated to strengthening its balance sheet.

That translates into BP buying back $2.5bn of shares in the second quarter after buying back $1.6bn in the first quarter, all while maintaining its current dividend.

Over the next three years, management believes the company can “deliver share buybacks of around $4bn per annum” and dividend growth of 4% a year. Those projections are based on an oil price of $60, which doesn’t seem overly optimistic.

BP keeps pursuing its “net zero” ambition

Windfall profits from high oil and gas prices are also allowing BP to push ahead with its plans to become a “net zero” business by 2050. The company aims to sell $25bn-worth of “legacy” assets by 2025 and cut its hydrocarbon output by 40% within the next decade.

At the same time, it will boost spending on low carbon and green energy projects including £18bn on the UK energy system. This move seems partly motivated by politics – oil majors are keenly aware of growing calls for a windfall tax on energy companies, so they need to show that they are willing to invest in the UK and to try to help deal with the cost of living crisis.

In all, BP’s first quarter figures appear to show a business firing on all cylinders – but as I have explored before, oil and gas production can be a tricky market. There’s no guarantee this good fortune will last.

Refinitiv broker estimates imply the company will report earnings per share of $0.89 (71p) this year, suggesting a forward price/earnings (p/e) ratio of 5.6, which does look cheap.

Still, if oil prices fall back next year, BP shares might not look so cheap. A dividend yield of 4.6% and share buybacks sweeten the appeal, but as I have explored before, BP’s future is far from certain. This uncertainty deserves a discount.

• See also:

Should you buy BP shares? The oil giant looks cheap, but approach with caution

What is a windfall tax?

Rupert Hargreaves

Rupert was the former Deputy Digital Editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. 

His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks. 

Rupert has freelanced as a financial journalist for 10 years, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them. 

He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service. 

He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.