Shares in FTSE 100 giant BP (LSE: BP) were on the front foot this morning as the company overcame concerns relating to the recent reversal of the oil price and reported a rise in underlying replacement cost profit (the industry’s preferred measure).
Coming in at $3.48bn for Q4, this was down from the $3.84bn achieved in Q3 but still 66% ahead of the $2.1bn reported at the same time in the previous financial year.
This brings underlying replacement cost profit for the whole of 2018 to $12.7bn — over double what was achieved in 2017 and far more than analysts were expecting.
At 11.2%, the company’s return on average capital employed — a measure used in the oil industry to gauge how much profit a company is making compared to the investment it makes in itself — also compared favourably to the 5.8% recorded in 2017. In other words, BP has very much succeeded in squeezing more profit out of its assets in the last year.
Like industry peer Royal Dutch Shell, the oil major also revealed that operating cash flow had increased in 2018 — up 8% to $26.1bn, although this does exclude the $3.2bn in payments relating to the Gulf of Mexico disaster. In line with its strategy of becoming a more streamlined beast, total divestments came to $3.5bn last year with another $10bn planned for the next two years.
Commenting on today’s numbers, Group CEO Bob Dudley said that the company now had “a powerful track record of safe and reliable performance, efficient execution and capital discipline“. This had been achieved, he added, while “bringing more high-quality projects online, expanding marketing in the Downstream” and (with reference to its recent deal to buy onshore US oil and natural gas assets from the miner) “doing transformative deals such as BHP.“
BP’s stock is up 4% at the time of writing, clawing back the gains it gave up as the oil price lost momentum in the final three months of 2018. For a company that already has a market cap of over £100bn, that’s about as good as can be expected for those already invested.
But, let’s be honest, while further capital growth can’t be discounted, BP remains very much an income play. On this front, investors will be comforted that the payouts are now growing.
Having been stagnant for so long (2018 saw the first hike for four years), BP announced a Q4 dividend of 10.25 cents a share — an increase of 2.5% compared to the same period last year. Further increases can’t be guaranteed but it’s certainly a step in the right direction.
The shares were trading on a little under 12 times earnings before markets opened this morning. That’s neither ludicrously expensive but nor is it as cheap as its larger FTSE 100 peer Shell. Nevertheless, those considering buying should bear in mind that much of BP’s success is dependent on something it can’t control.
Notwithstanding the acquisition of UK charging company Chargemaster (in light of the expected shift to electric vehicles) and its renewable energy business (Lightsource BP), the company’s fortunes still remain tied to the oil price. Should we get another sustained drop like that experienced back in 2016, prepare for BP’s share price to follow suit.
If that sounds too risky for you, there are arguably far safer ways of generating income from your portfolio.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.