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BP reports a huge profit rise of 244%! Would I buy it now?

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The stock markets had a muted start this morning, but FTSE 100 oil biggie BP (LSE: BP) had a cracking beginning. It was the biggest index gainer as markets opened due to its strong first quarter results. 

BP’s big wins this quarter

I see two big wins in its results:

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#1. BP’s profits rise: Headline profits were at $4.7bn, which is of course a huge improvement from the losses seen during the same quarter last year. 

But even sequentially, it is a big improvement as oil price increases benefited BP’s bottomline. Profits are up 244% from the last quarter. Besides oil prices, it also attributes the profit rise to “exceptional gas marketing and trading performance” and improved refining margins. This is a big bounce back for BP after it reported losses in 2020.

Also noteworthy is the fact that profits have beaten analyst estimates. Analysts had estimated its replacement cost profits, which measures profits net of inventory holding gains, at $1.4bn. But the actuals are almost double the number at $2.6bn. 

#2. Net debt reduced: Its net debt is down by 35% from a year ago. At $33bn, it is also reduced by 14% from the quarter before. It has overachieved on its targets of $35bn. 

As I said yesterday in the context of the FTSE 100 precious metals’ miner, Polymetal International, repayment of debt in good times reflects the priorities of a company. At a time when the world economy is still in an uncertain place, streamlining financial health is a prudent move in my opinion. 

Positives for the BP share price

These blockbuster results add to the three positives I already see for BP:

#1. Dividends: BP has a healthy dividend yield of 5.1%. There are other FTSE 100 stocks with higher yields, including tobacco biggies and utilities. However, I like BP because it has a long history of paying dividends. With improved performance, at least in the foreseeable future, I would expect its dividends to either improve or stay constant as well. Of course, dividends are never guaranteed.

#2. Hedging inflation: Inflation can increase companies’ costs and erode their earnings. However, in BP’s case, it actually profits from an oil price rise. In other words, it can see cost increases too, but at least it is protected because its end products’ prices are rising too.

#3. Demand boom: As the global economy opens up, demand is expected to boom and that includes oil demand. After over a year of lockdown, barring any unforeseen situations, travel should be back with a bang. And that means oil biggies like BP and Royal Dutch Shell will continue to make gains. 

My concerns

My big reservation about BP also holds for stock markets as a whole. We really should not forget that the pandemic is still raging and variants can still wreak havoc. Travel is the first sector to be hit by it. The BP share price is still way below its pre-crisis levels and can fall more, if that happens. 

But I see the possibility of a boom as bigger than that of doom. I would buy BP. 

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Manika Premsingh owns shares of BP, Polymetal International, and Royal Dutch Shell B. 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.

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