After three strong years, BP (LSE:BP) shares, like those of its oil peers, have displayed some weakness amid concerns of a slowing global economy. And today, BP reported underlying profits for the second quarter of $2.6bn, missing analysts’ expectations of $3.5bn by almost $1bn. That’s big miss.
So, why hasn’t the share price collapsed? Let’s explore.
What investors see
BP’s underperformance was attributed to reduced refining margins and planned maintenance activities, as well as less volatility in energy markets, which had previously bolstered earnings over five quarters.
Reported profit for the quarter was $1.8bn, compared with $8.2bn for the first quarter 2023. Earnings per share witnessed a decline from $27.74 to $14.77. Meanwhile, net debt was an 11.4% increase, reaching $23.66bn.
However, as the final large western oil and gas company to publish its half-year results, investors were likely unsurprised to see this drop in earnings, and potentially the miss versus consensus. ExxonMobil and Shell saw their profits decline by 56%, while TotalEnergies‘ earnings contracted by 49%.
Buybacks and dividends
Of course, performance isn’t the only thing impacting share prices.
In its earnings report, BP committed to buying back $1.5bn of shares before the Q3 results announcement later in the year. The energy major had already reduced its traded share count by more than 9% between April 2022 and March 2023.
Share buybacks are a corporate action where a company repurchases its own outstanding shares from the open market. This means the company uses its available funds to buy back its own stock, reducing the number of outstanding shares in the market.
BP also committed to increasing its dividend by 10%, to ¢7.27 for the quarter, pushing the dividend yield closer to 5%. So, despite the falling performance numbers, BP shares actually pushed upwards on Tuesday.
Is BP a buy?
BP possesses the lowest gross profit margin among the supermajors, standing at 30.7%. Nevertheless, it operates as a robust cash-generating machine. At present, it trades with a price-to-earnings ratio of 4.3 and a forward P/E of 5.5, based on projected earnings for the year. This indicates a significant discount compared to the index average.
However, there are apprehensions, reflected by the low P/E ratio, concerning a decelerating global economy and potential oil oversupply in the near future. While OPEC nations may implement further production cuts to mitigate falling oil prices, uncertainty remains.
Looking further ahead, my outlook remains optimistic for oil, energy, and BP. With energy firms, the investment hypothesis is always closely intertwined with the outlook for oil. Personally, I anticipate higher average oil prices over the next decade compared to the previous one, driven by heightened competition for a progressively scarce resource.
Despite the share price showing an upward trend today, my interest in the stock remains unchanged. I’m actively considering adding it to my portfolio in the upcoming weeks.
