Although not reaching anywhere near the record profits set in 2022, oil major BP (LSE: BP.) still managed to make a hefty $13.8bn in 2023. Its share price may have jumped on results day, yet it remains a laggard amongst its industry peers. But just how much longer will this be the case?
Shareholder guidance
The continued strength of its underlying financial performance is just the tonic newly appointed CEO Murray Auchincloss needs. He’s acutely aware that arresting the company’s share price decline is his top priority.
I’m buoyed by the fact that BP has now laid out its financial framework for the next two years. In particular, it continues to prioritise returns to shareholders.
Over the past year, the dividend per share (DPS) has grown 10%. At the current share price, its dividend yield sits at 4.8%.
It estimates that it has capacity to increase DPS 4% annually when oil is around $60. In the last quarter, brent crude averaged $84. Therefore, unless prices decline significantly over the next 12 months, 4% is probably conservative.
For the first half of 2024, it’s committed to buying back another $3.5bn of its own shares. This is in addition to the $1.75bn buyback announced during its Q4 results (7 February). Over the past two years, its share capital has reduced by a huge 16%.
Shifting strategy
The company’s price-to-earnings (P/E) multiple is one of the lowest in the industry. One reason for this is that the market is yet to be convinced that its move to an ‘integrated energy company’ is good for shareholders.
The new CEO has made it clear that he has no intention of moving away from this strategy. For example, it recently agreed to take full ownership of Lightsource bp, one of the top solar providers globally.
Despite such investments, BP will continue to primarily be about hydrocarbons for many decades. The lion’s share of its proposed $16bn annual expenditure budget remains allocated to oil and gas projects.
Energy outlook
My bullish stance on BP is based on the fact that I believe that the industry will exist in its present form way into the future. The obvious risk is that my bet is wrong.
In its World Energy Outlook report, the International Energy Agency predict that oil usage will peak by 2030. However, in that report it also acknowledges that “continued investment in fossil fuels” will be necessary far beyond 2030.
At the moment, there are so many variables that need to be understood that it’s literally impossible to map out how our journey towards net zero will ultimately unfold.
I believe that BP’s CEO has been coming to a similar conclusion as he said: “Yes, we want to help scale lower carbon energy value chains, and position ourselves to profit from them. But we must remain flexible, adjusting in line with changing demands and societal needs.”
Today, the world feels more fractious than it’s been in decades. For me, we’re never more than a geopolitical event away from a crisis.
Despite all the uncertainty of the last 12 months, BP remains a well-managed, highly profitable business. Eventually, the market will wake up to this fact. With its share price near a 52-week low, I believe investors should consider buying as I have recently.
