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Is BP plc now a buy after beating analyst expectations?

Shares in FTSE 100 oil giant BP (LSE: BP) rose over 3% in early trading this morning, building on the recent positive momentum seen in the stock over the last few months. The reason? A solid set of analyst-beating Q3 figures that showed a company well on the road to recovery. Let’s take a look at those numbers in more detail. 

Jump in profits

As updates go, I’m not sure holders could have asked for much more. 

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According to the company, underlying replacement cost profit for Q3 (its preferred measure of profit) was $1.9bn, comparing favourably with just $684m in the previous quarter and $933m for the same period in 2016. It was also far above analyst expectations of $1.58bn. 

When the more standard measure of profit is employed, BP arrived at a figure at just under $1.77bn for Q3 — better than the £1.62bn achieved over the same period last year and driven by a five-year earnings high from its “downstream” businesses. This brought the company’s overall profit so far in 2017 to £3.36bn — a huge improvement on the $382m loss experienced in the first nine months of last year.

Cash flow at the £99bn-cap behemoth is also looking far healthier. Taking into account ongoing payments relating to the Gulf of Mexico oil spill, this stood at $6bn in Q3 compared to just $2.5bn the previous year. For the nine months, the figure rises to $13bn — again, a massive contrast to the $8.3bn revealed in October 2016.

While a large amount of debt on the company’s balance sheet may concern some existing and prospective investors (just under $40bn compared to $32.4bn a year ago), this should now begin to fall as the costs relating to the aforementioned Deepwater Horizon disaster lessen and BP begins to reap the benefits from recent disposals. The latter are expected to bring in roughly $4.5bn for the full year with $2.1bn of proceeds expected in Q4 alone.

Commenting on today’s news, CEO Robert Dudley reflected that the company was “steadily building a track record” of achieving its goals and growing its various businesses. He did, however, go on to say that there was “still room for further improvement” and that BP was committed to increasing free cashflow and payouts to shareholders.

So, with shares now hitting their highest price in 2017, is there further upside ahead for the company and its holders?

Good times ahead?

It’s certainly possible. While BP’s share price will never gallop (and remains tied to the price of black gold), the decision to recommence a buyback in Q4 is indicative of just how confident management is in the industry’s near-term future. This, in turn, should attract more market participants back to the stock, thus adding to the rise already seen over the past couple of months.

The pull of BP’s substantial regular payouts to its owners can’t be underestimated either. Very few members of the FTSE 100 index come even close to matching the 6% yield on offer for the current year, even if the extent to which it is covered by profits leaves something to be desired (for now). With savings accounts likely to continue offering derisory rates of interest for some time to come, many will continue to believe that investing in BP, as part of a sensibly-diversified portfolio, is a risk worth taking. 

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Paul Summers has now position in any of the share mentioned. The Motley Fool UK has recommended BP. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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