Low oil prices might be great for energy consumers. But they’re not so good for the BP (LSE: BP.) share price. It fell 4% in early trading Tuesday (29 April) on Q1 results.
The oil giant posted a 49% year-on-year profit drop. Operating cash flow fell 28% as BP missed estimates.
It sounds like it’s been a tough quarter. But CEO Murray Auchincloss described it as “significant progress” in “a fundamental reset of our strategy.”
Refocus on oil
BP is in a period of major change, as it pivots away from the low-carbon focus that hadn’t been a screaming success for the share price.
“We had our highest upstream operating efficiency in history. Our refineries in the first quarter ran at the best they’ve run in 24 years,” the CEO told CNBC. And he spoke of three major new projects and six exploration discoveries.
We’re looking at a forecast full-year dividend yield of 6.7%. And the company announced a Q1 dividend of eight cents per share. There’s a new a $0.75bn share buyback, a signficant scaling back from $1.75bn in the previous quarter.
It still makes it sound like the cash situation at BP is healthy enough. But I’m a bit disturbed to see net debt rising to $27bn. It had declined a little to $23bn at the end of 2024. It’s around 35% of company’s market cap.
All change
These are very uncertain times, and we really don’t know how BP’s renewed strategy on traditional hydrocarbon energy sources will turn out. As if to stress there’s no return, the company has said Giulia Chierchia, in charge of the sustainable energy business, will leave in June and won’t be replaced.
And divestment plans are accelerating, with $3bn to $4bn of assets set to be disposed this year. By the end of 2027, BP reckons divestment proceeds should help get its net debt down to between $14bn and $18bn. That would ease one of my concerns if it happens as planned.
BP also faces pressure from the Elliott activist hedge fund, which believes UK operations are top heavy. Elliott reportedly wants to see poorly-performing parts of the company, like its venture capital arm, dumped. The fund controls more than 5% of BP’s shares.
What to make of it
Forecasts put the price-to-earnings ratio at 10, dropping as low as 7.5 by 2027. That looks cheap. And the return to ‘good old oil’ will surely give a lot of investors confidence in a rising valuation over the next few years.
But then, analysts are suggesting oil could remain around the $60 level in 2025 and 2026. That’s on the back of OPEC+ loosening its limits on production, while other countries also turn on the taps. And the long-term viability of fossil fuels still remains an issue, whatever the current political mood.
It’s too risky for me. But for investors who can handle that, a time of uncertainty and pessimism like this might prove to be a time to consider buying.
