Unless one was brave enough to buy during Covid, BP (LSE: BP.) shares have made for a poor long-term investment. Indeed, the stock is trading at the same level as it was back at the turn of the century.
Over the past five years, the company has pursued a muddled strategy. But now it has pivoted back to oil and gas, its latest results released today (5 August) are showing encouraging signs of moving in the right direction.
H1 results
Compared to Q1, underlying replacement cost profit increased $700m. However, results were mixed across its three main reporting lines.
Oil production and operations, saw a $600m decline as a result of lower oil and gas prices, as well as an increased charge for depreciation, depletion and amortisation. A strong gas trading result helped boost profit in gas and low carbon energy. But its standout performer was customer and products, which rose $900m on the back of stronger refining and fuel margins.
Operating cash flow more than doubled to $6.3bn. Some of this increase was attributable to an already anticipated decline in working capital build, as peak driving and flying season gets into full swing.
Costs
Between 2019 and 2024, total costs across the business increased by $10bn to $43bn. 80% of this increase related to variable costs and therefore outside of its control. But that still leaves $2bn of underlying structural cost increases.
At its strategy update back in February it set a target of reducing underlying costs by $4bn-$5bn by the end of 2027, relative to 2023. So far in 2025, it has realised $900m in savings, taking total savings since the programme started to $1.7bn. When costs related to growing the business are taken into account, the absolute saving is $500m.
By the end of 2025, the business will have reduced its head office workforce by 16%. This is of course a distressing time for individuals but reflects the fact that BPs contractor base had simply got too big.
Net debt
Although net debt fell by $1bn, to $26bn, it’s still a long way short of its $14bn-$18bn range by the end of 2027. Reaching that target will only be achieved if it can secure a buyer for Castrol, its lubricants brand. There’s no update on that front yet but I’m buoyed by the fact that the brand’s earnings increased 20%.
The average price realised for brent crude in the quarter was $67.9, 5% lower than its price assumption laid out back in February. Meeting its target of growing free cash flow at a compound annual growth rate of 20% is very much dependent on its oil price assumptions being correct. Should we move into an era of sustained lower prices and it fails to deliver, the stock will undoubtedly suffer.
Oil prices
I’m of the view that we’re heading into a world of higher energy prices. We’ve already seen gold prices soar and I believe oil will eventually participate. That’s exactly what we saw happen during the inflationary decade of the 1970s.
The current macro environment characterised by ballooning US deficits, a falling dollar, rising geopolitical fragmentation and accelerating deglobalisation trends, provide the kind of backdrop that will be highly supportive of energy prices. Personally, I’m bullish on BP and will continue to buy when finances allow.
