BP’s (LSE BP) share price leapt nearly 3% on the 5 August release of its Q2 results.
This was unsurprising, as underlying replacement cost profit (its net profit measure) was $2.35bn (£1.77bn) against analysts’ expectations of $1.81bn.
More surprising to me was that this outperformance occurred despite a period of lower average oil prices than the same quarter last year. According to the firm, the robust number principally reflected stronger realised refining margins and very positive oil trading operations.
I think more broadly that the number underlines the potential of BP’s recent strategic shift from renewable energy back to fossil fuels.
CEO Murray Auchinloss added that BP’s ‘upstream’ energy operations saw record operating efficiency in Q2. Upstream relates to the exploration and production stages of the oil and gas business.
As a result of these figures, BP’s net debt fell to $26.04bn at end-Q2 compared to nearly $27bn at end-Q1. Additionally positive was that the firm increased its quarterly dividend to 8.32 cents from 8 cents. And it added that it will maintain the pace of its share buyback programme at $750m for the third quarter. These tend to support share price gains.
The new discovery as part of the strategic reset
BP announced a strategic reset on 26 February after years of share price underperformance relative to its fossil-fuel-focused competitors.
This involves cutting its previously planned renewables funding by over $5bn (£3.9bn) to $1.5bn-$2bn a year. It will also see investments in oil and gas projects increase by around 20% to $10bn a year.
Consequently, it expects to increase oil and gas production to 2.3m-2.5m barrels of oil equivalent per day (boepd) by 2030. The oil equivalent measure reflects the energy content of different fuels (such as gas) in terms of one crude oil barrel’s worth of energy. In 2024, it produced 2.36m boepd, which was a 2% increase compared to 2023.
According to the firm, so far this year it has brought five new oil and gas major projects onstream. It has also sanctioned four more and made ten exploration discoveries.
One of these was announced on 4 August – its largest oil and gas discovery in 25 years — in Brazil’s Santos basin.
According to BP, this Bumerangue discovery is probably its biggest find since Shah Deniz in 1999. This site in the Caspian Sea had 1trn cubic metres of gas and 2bn barrels of condensate initially in place.
That said, no specific reserve estimate has been provided yet for the Bumerangue site.
A risk here to BP’s profits is that some new oil and gas developments do not pan out positively. Another is that oil and gas prices enter a sustained downturn.
However, consensus analysts’ forecasts are that BP’s profits will increase by a whopping 28% each year to end-2027.
And it is growth here that ultimately drives any firm’s share price and dividends higher.
Will I buy more of the stock?
A discounted cash flow valuation shows BP’s shares are 54% undervalued at their current £4.22 price. Therefore, their fair value is £9.17.
I think its ongoing strategic shift, deeply undervalued share price, and stellar earnings growth will drive a sustained surge in BP’s share price. Therefore, I will buy more of the stock as soon as possible.
