It’s a bad day for BP (LSE: BP), with the share price down almost 4% after it reported a thumping 41% drop in third-quarter net profits from $3.8bn to $2.3bn. It’s been a pretty poor year all round for BP, with the share price down 3% in the last 12 months.
Today’s slump was down to “lower prices, maintenance and weather impacts“, as well as the impact of its divestments programme, which slapped the group with a “non-cash, non-operating after-tax charge of $2.6 bn”.
It’s been a tough year for Big Oil. Fellow FTSE 100 behemoth Royal Dutch Shell is down 5% this year, and as climate change concerns grow, many are questioning whether the energy giants are going to be the dividend cash machines of the future.
Today’s update was bullishly headlined “Continued strong operating cash flow and strategic delivery”, but investors understandably chose to focus on the group’s “significantly lower upstream earnings” rider, which tells a different story.
The cash is still flowing
Mexico oil spill payments continue to inflict damage – $400m on a post-tax basis. Excluding those, operating cash flow stood at $6.5bn for the quarter, while downstream operations were expanding nicely in fast-growing Asian markets. BP pumped out 3.7m barrels of oil equivalent a day, up from 3.6m last year.
The £100bn group has also been divesting to simplify operations and reduce debt, and is nicely ahead of schedule, with transactions totalling $7.2bn at the end of the third quarter, and on course to reach $10bn by year-end.
Group CEO Bob Dudley also hailed “strong operating cash flow and underlying earnings in a quarter that saw lower oil and gas prices and significant hurricane impacts”.
Double the fun
One disappointing quarter does not destroy the long-term investment case. Today’s $2.3bn profit figure may have been sharply down, but it was still better than the $1.7bn analysts had braced themselves to hear. My colleague Roland Head reckons BP could still double your money from a combination of share price growth and dividends.
Net debt remains a worry, as this stood at a hefty $46.5bn at 30 September, up from $38.5bn a year ago. I would like to see sustained progress in driving this down, to secure the future dividend stream.
Incoming chief executive Bernard Looney also needs to manage the transition towards biofuels, solar projects and electric car chargers, while making sure the oil and gas keeps flowing to provide shareholders with their dividends.
Today BP announced a payout of 10.25 cents for the quarter, and the stock is currently forecast to yield 6.2%, although with relatively thin cover of 1.2 times earnings. City analysts are predicting an even juicier 6.4% by 2021, with forecast cover of 1.33. Earnings per share are forecast to rise 4% this year and 14% in 2020.
BP currently trades at 14 times forward earnings, so it isn’t too pricey, although if fears of a global slowdown are proved correct the oil price could take another hit, and that will hurt from here. So there are challenges, but I would still buy BP. The oil age isn’t over just yet.
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Harvey Jones 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.