Since the beginning of the year, the BP (LSE: BP) share price has risen over 20%. This makes a change from 2020, when the stock fell almost 50%. So what has changed?
Well, the environment isn’t not all doom and gloom these days. As the global economy starts to recover, demand for oil is expected to pick up. After all, the world still runs on the stuff. Of course, this is good news for the BP share price and hence a big reason for why the stock has been rising.
But I think there are other reasons why the shares have rallied. Last week, the oil giant released its first-quarter results, which I’ll go into in some detail shortly. They highlighted that the company is taking the right steps. I recently commented on the shares and would still buy the stock in my portfolio today.
The results
In a nutshell, BP’s results for the first three months of 2021 were generally good. CEO Bernard Looney commented that “this quarter demonstrates what we mean by performing while transforming”. And I completely agree with his statement.
Last year was horrible for the oil giant, but it seems that things are recovering. Reported profit for Q1 2021 was $4.7bn, compared to $1.4bn for the fourth quarter 2020.
I was also impressed by the $11bn of cash inflow it generated in the first three months of the year. BP has a good history of paying a dividend and so a strong cash flow means that the income payments are likely to stay. Of course, there is no guarantee of this.
Net debt
I think its net debt reduction has been driving the BP share price. The oil giant set a target of reducing this to $35bn. It’s encouraging to see that this goal has been met a year early. In fact, it now stands at $33.3bn.
So how has BP managed to reduced it liabilities so quickly? Well, it has been selling off assets. Divestment and other proceeds amounted to $4.8bn in the quarter, including $2.4bn from the divestment of a 20% stake in Oman Block 61.
But I think it’s worth mentioning that this is a short-term strategy. The company can only get so far by selling its assets, until it runs out. The idea here is to get the net debt into a manageable position, which should boost the BP share price in the long term.
Share buybacks
What has also helped the stock rise is the announcement of $500m in share buybacks, due to commence in the second quarter of 2021. In fact, it intends to “distribute 60% of surplus cash flow for 2021 through share buybacks, with the remaining 40% being used to further strengthen the balance sheet”.
I like that the board is shareholder-friendly. And I reckon the 60/40 split is a sensible and strategic approach.
Risks
There are risks, of course. The stock is linked to the oil price. So any volatility is likely to impact the shares. Any further Covid-19 setbacks could hinder revenue, profitability and dividends.
BP is also transitioning to being a renewable energy player, but this will take time and cost money. That could weigh on the BP share price.
But after its recent quarterly results, I remain confident that it’s on the right path. The shares have been rising recently and I expect this to continue.
