The BP (LSE: BP) share price opened down over 4% on 31 October as its Q3 net income missed analysts’ expectations. It declared $3.3bn in underlying replacement cost profit (its term for net income), against consensus estimates for $4bn.
According to the global oil and gas giant, strong oil trading and refining margins were offset by weak gas results.
I already hold the stock, but I am looking to buy more for three key reasons. First, the Q3 results have several positives in them as far as I am concerned. Second, the outlook for the oil – and gas – sector still looks bullish to me. And third, the company has maintained its healthy shareholder rewards.
One risk in the stock, of course, is that there is a sustained slump in global commodities prices. Another is that anti-oil protests might cause the company to expedite its energy transition. This could cause failures in its energy delivery networks.
Positives in the results
Despite missing analysts’ estimates, the fact remains that BP made $3.3bn net income in Q3. This compares well to the $2.6bn made in Q2, but less well to the $8.15bn made in Q3 last year.
But the oil market is highly volatile, so I expect results from its leading companies to reflect that. In Q2 and Q3 last year, oil and gas prices shot up in the aftermath of Russia’s invasion of Ukraine.
No such event occurred in Q2 and Q3 this year, although actions from the OPEC+ cartel have broadly been supportive of pricing.
Importantly for me as well, given concerns about BP’s asset-to-liabilities mix, net debt was reduced by $1.3bn — to $22.3bn. It also expects its capital expenditure to come in at the lower end of its indicated range of $16bn-$18bn this year.
Bullish oil market
Looking ahead, BP is likely to benefit from ongoing bullishness in the oil market, in my view.
On September 5, Saudi Arabia extended its rolling 1m barrels per day (bpd) oil production cut to the end of this year. Fellow OPEC+ oil cartel heavyweight Russia said it would do the same for its 300,000 bpd cut.
Further support for oil prices may come from the demand side of the market. China – the biggest buyer of several key commodities – released figures on 18 October showing its economy grew by 4.9% year on year. This compared to consensus analysts’ forecasts of just 4.4%.
A bullish oil market should also benefit gas prices, as historically around 70% of these are comprised of the oil price.
Increasing shareholder rewards
In 2022, the company’s total dividend was 24 cents per share. Based on the current exchange rate and share price of £5.00, this gives a yield of 3.9%. This is not especially exciting to me, as the average FTSE 100 yield is 3.8% now.
However, the Q1, Q2, and Q3 dividend payments were 21% higher than the same payments last year. If that occurred with 2023’s total dividend, based on the current share price, the yield would be a healthier 4.8%.
Additionally positive is that BP committed to using 60% of 2023 surplus cash flow for share buybacks. It intends to execute a further $1.5bn buyback before releasing its Q4 results. These are generally supportive of a company’s share price.
