The BP (LSE:BP.) share price has been on a bit of a roll over the last couple of years. Since the start of 2021, the oil giant has seen its market capitalisation grow by almost 80%. In the last 12 months, some of this momentum seems to have diminished. However, following today’s (6 February)results, the firm continues to make solid strides in the right direction. Let’s take a closer look.
Underlying gross margins hit record highs
Following Bernard Looney’s termination as CEO last year following claims of personal misconduct, investors were rightly concerned that management would become distracted. However, CFO Murray Auchincloss is now at the helm as interim CEO. And Kate Thomson is taking his place as CFO. So it seems the executive suite appears to be back on track.
In the meantime, the group’s fourth quarter 2023 results didn’t disappoint. That may sound off, considering profit attributable to shareholders collapsed by 92.4% from $4.9bn to $371m versus the previous quarter! However, this figure is a bit misleading since it includes non-cash charges.
With changes in the macroeconomic landscape and commodity prices, management has reassessed the value of its inventory and assets, resulting in a chunky impairment charge. But, on the back of record constant currency gross margins in the fourth quarter, operating cash flows were actually up by 7.2% year-on-year, reaching $9.4bn.
Subsequently, the group’s cash balance increased to $33bn, lowered net debt by $1.9bn and reduced the firm’s gearing to 19.7% versus 20.3% a year ago. In other words, the balance sheet has gotten stronger, reducing BP’s leverage.
What does this mean for shareholders?
With cash flow generation continuing to chug along nicely, management completed its previously announced $1.5bn share buyback programme a few days ago. And it subsequently launched a new $1.75bn programme to be completed in the first quarter of 2024, with another $1.75bn in the second quarter as well.
This scheme is part of BP’s commitment to return 80% of its surplus cash to shareholders. But despite the generous payouts, the company continues to make investments in sanctioning new oil projects, EV charging stations, solar energy as well as battery storage.
This strategy undoubtedly opens new growth opportunities with renewable investments, in particular, helping push BP towards hitting its 2050 net zero goal. However, being a commodity-driven enterprise, the BP share price is not immune to volatility.
The ongoing conflict in the Middle East has already started interrupting global trade. And should the situation escalate, there are justified concerns of significant disruption to the oil & gas industry. Since this geopolitical risk started last October oil prices have been dropping along with natural gas. And continued downward pressure could end up sending BP shares in the wrong direction.
Having said that, the long-term potential of BP continues to look promising, especially with management steadily transitioning the enterprise away from fossil fuels. Therefore, in my opinion, if investors are seeking diversified exposure to the energy sector, BP shares might be a good destination for capital. But it’s not one that I’m personally interested in adding to my portfolio.
