- First-quarter results weighed down by weak performance at refining
- Castrol business put under review
- Further buyback announced but reduced in size compared to first quarter
- Weak cash flow will do little to cool shareholders’ frustrations
- Oil major’s shares no higher than they were in 1997
“It is early days for BP and its new strategy under boss Murray Auchincloss and chief financial officer Kate Thomson, but investors do not seem impressed by the first set of quarterly results, as the shares fall back to levels which mean they are no higher now than in early 1997,” says AJ Bell investment director Russ Mould.
“An unchanged dividend of $0.08 per share will help to reaffirm the shares’ yield and their potential appeal to income seekers, but the reduction in the quarterly run rate of share buybacks is an admission that cash flow is not as strong as it could be – and that will be a red rag to a bull so far as activist shareholder Elliott is concerned, since it is arguing BP should do more to generate cash.
Source: LSEG Refinitiv data
“BP’s renewed emphasis on maximising the value of its existing hydrocarbon assets is off to a sticky start, since both oil and natural gas prices are under pressure. Worries over the impact on global growth of President Trump’s tariff and trade policies are to blame here, coupled with increased OPEC+ production and American plans to boost shale output. None of these are within BP’s control.
Source: LSEG Refinitiv data
“Weaker commodity prices are a hindrance, but the real shortfall in earnings compared to the first three months of 2024 comes from the downstream Customers and Products operation. Refining margins have been under pressure industry-wide for some time, the trading operations are not seeing the sort of volatility from which they benefited in 2022 when Russia invaded Ukraine, and the Castrol lubricants business clearly continues to disappoint management, who now have the unit under review with all options under consideration.
Source: Company accounts
“Again, lower refining margins are an industry-wide issue, and, in this respect, shareholders may be prepared to cut BP a bit of slack – but probably not too much.
“A big swing in working capital in the first quarter may well unwind through the rest of the year, but free cash flow was not strong enough to fully fund $1.3 billion a quarter in dividends, with $750 million in buybacks on top.
Source: Company accounts
“That helps to explain why net debt is rising again. Excluding leases and pensions, net debt bottomed at $17.3 billion in Q3 2022 and has now reached $24.9 billion.
“The fright provided by Covid, and the brief collapse in hydrocarbon prices, prompted management to reduce the net debt pile of $51 billion through capex cuts, cost cuts and disposals and that supported the share price – lower debt means less risk and less risk can mean a higher share price, or at least a higher multiple of earnings, all other things being equal.
“But the opposite holds true, and shareholders are likely to look to BP for evidence that it can generate more cash, organically at best and via disposals if it must, to ensure the debt does not keep rising and buybacks and dividends can continue at current levels.
Source: Company accounts
“Management is still targeting a reduction in net debt to between $14 billion and $18 billion by the end of 2027, down from $24.9 billion, and plans for $3 billion to $4 billion in asset sales and lower capital investment in 2025 are clearly part of that. Delivery here would help convince shareholders that BP is on the right track, but too many more quarters of weak cash flow and lower share buybacks may not help management’s cause and lead to further engagement by the usually indefatigable Elliott.
Source: Company accounts, management guidance for 2025E
“In the meantime, the dividend yield may provide some support to the shares. Annualising the first-quarter payment of $0.08 gives a yearly payment of $0.32, or 23.9p a share at current exchange rates, and that is enough for a yield of nearly 7%.
“Buybacks could further top up the total ‘cash’ yield on the shares, but the lower run rate for the second quarter may concern some income seekers.”
Source: Company accounts, analysts' consensus forecasts, management guidance for Q2 2025E
