Oil giant BP (LSE: BP) has released half-year 2018 results this morning, reporting a sharp increase in profits. Here’s a closer look at the numbers as well as an analysis of the investment case.
Profits and cash flow
For the six months, underlying replacement cost profit (BP’s preferred measure of profits) came in at $5,408m, up 146% on last year’s figure of $2,194m. Underlying replacement cost profit per ordinary share was 27.1 cents, up from 11.2 cents last year.
Excluding post-tax amounts related to the Gulf of Mexico oil spill, operating cash flow for the period came in at $12.4bn, compared with $11.3bn for the same period last year.
Dividend and buybacks
Great news for dividend investors – BP has hiked its quarterly dividend from 10 cents per share to 10.25 cents per share. This is the first rise since the third quarter of 2014.
BP’s share buyback programme also continued during the first half of the year, with 29m shares bought back at a cost of $200m.
Net debt
Net debt at 30 June was $39.3bn, versus $39.8bn a year ago. The group advised that it expects gearing to remain within the target band of 20%-30% during the second half of 2018.
Management statement
Chief Executive Bob Dudley was upbeat about the group’s performance and prospects, saying: “We continue to make steady progress against our strategy and plans, delivering another quarter of strong operational and financial performance. We brought two more major projects online, high-graded our portfolio through acquisitions such as BHP’s US onshore assets and invested in a low-carbon future with the creation of BP Chargemaster.” He added that the “momentum and the strength of our financial frame” were behind the dividend rise and that “this reflects not just our commitment to growing distributions to shareholders but our confidence in the future.”
BP: buy, sell or hold?
Today’s numbers look good and the oil major is clearly benefiting from the rise in oil prices over the last 12 months. It appears that the market is happy with the numbers, as the stock is up this morning. Yet after a 25% share price gain over the last year, is it too late to buy BP now?
Personally, I don’t think it is. At the current share price, I believe the stock could still offer upside potential.
In recent months, City analysts have upgraded their earnings forecasts for BP significantly, which is a bullish sign. For example, when I covered the stock back in April, the consensus earnings estimate for FY2018 was 46 cents per share. Today, the consensus figure is 56 cents per share, placing the stock on a forward P/E of just 13.5, which doesn’t look stretched.
At the same time, brokers have been upgrading their price targets for BP recently. In July alone, Barclays raised its target price to 705p from 690p, JP Morgan raised its target price to 650p from 600p and Credit Suisse raised its target price to 640p from 610p. If these brokers are right, there could be more gains on the horizon.
I also think the dividend increase is fantastic news and could provide further upwards share price momentum. Assuming BP continues to pay out 10.25 cents per share for the third and fourth quarters, the prospective yield is still high at 5.4%.
Weighing up all these factors, I think BP shares continue to offer appeal.
