The BP (LSE: BP) share price breached the 300p threshold in early trading this morning. A quick read of the oil giant’s latest update on trading explains why.
Profits up, debt down
Thanks to a bouncing oil price and the disposal of assets, BP achieved a reported profit of $4.7bn over the first quarter of its financial year. That contrasts favourably to the $1.4bn made in the prior three-month period. Unsurprisingly, it also looks far better than the $4.4bn loss seen in Q1 2020.
Positively, all this cash has allowed BP to dramatically reduce its debt pile. This fell from $38.9bn in December to $33.3bn by the end of March, beating its $35bn target around one year ahead of schedule. Again, this is a dramatic improvement on the $51.4bn at the end of Q1 2020.
According to CEO, Bernard Looney, today’s numbers show that BP is “performing while transforming“. As far as the latter is concerned, the company has been progressing its renewables strategy. This has included building an offshore wind business, buying a stake in Digital Charging Solutions (which produces charging software) and rolling out its new EV charging hubs. Last month, it also announced plans for a blue hydrogen production facility in Teeside.
Turning a juggernaut like BP around is easier said than done. However, I’m not sure I’d be complaining about what’s been achieved so far if I were an investor.
And the dividends?
Yes, it’s worth mentioning the income stream.
One of the main reasons for holding BP over the years has been the income it provides. That said, the company was forced to slash its cash payments last year due to the pandemic. Today’s 5.25p per share cash return is identical to that returned in the previous quarter. But it’s lower than the 10.5p per share returned for Q1 2020.
Nevertheless, BP also announced today that it was commencing a $500m share buyback in Q2. Taking stock out of circulation increases the earnings per share on what’s left over. Theoretically, this should lead to a rise in BP’s share price. Speaking of which…
The bouncing BP share price
Something of an anomaly among UK stocks, the BP share price fell to its lowest ebb later in October 2020 rather than during March’s crash. Since then, however, the stock has increased 57% in value. That’s not as big as the recovery seen elsewhere. However, it’s not too shabby for such a market behemoth.
Despite this rise, the shares still look pretty cheap. A price-to-earning (P/E) ratio of a little under 11 before markets opened suggests I wouldn’t be overpaying if I bought now.
Risks
Of course, BP is not devoid of risk. The last year has shown just how dependent the company is on something it can’t control, namely the price of ‘black gold’. The pandemic is also far from over and the rush for value stocks could quickly reverse in the event of a significant third wave.
There’s also the opportunity cost of holding the stock. In contrast to some shares, BP will never multi-bag in only a few months.
Are there better ways of making money in the market? I think so. Notwithstanding this, I’m sure existing holders will be pleased with today’s news. Assuming the economic rebound continues, I think the BP share price will carry on climbing.
