To great anticipation, oil supermajor BP (LSE: BP) released its first-quarter results on Tuesday morning. The BP share price jumped by 3.3%, but then faded as shareholders digested the figures.
The BP share price loses steam
In its first results for 2021, BP revealed net profit of nearly $4.7bn, versus $1.4bn in the previous quarter. Underlying replacement cost profit (BP’s preferred profit measure) soared to $2.6bn, from $115m in Q4/2020. This vast improvement was driven by higher oil prices, better refining margins and “exceptional” gas marketing and trading performance. So far, so good for supporting the BP share price.
What really impressed me was BP’s soaring cash flow. Operating cash flow came in at $6.1bn, up $3.8bn on $2.3bn in Q4/20. BP also sold assets worth $4.8bn, adding to $4.2bn of proceeds in the previous quarter. This cash gusher allowed the group to reduce net debt to $33.3bn, down from $38.9bn in Q4/20 and $51.4bn a year earlier. Thus, BP reduced its net debt by over $18bn in 12 months. With net debt now below $35bn, BP has retired this target a year early. And yet the BP share price failed to maintain early-morning gains.
BP slips back under £3
After rising to 307p in early trading, the BP share price now stands at 295.5p, down a penny (0.3%) on Monday’s close. Perhaps investors were unimpressed that BP held its quarterly dividend at 5.25 US cents a share? That’s half the level of a year ago, before the company took an axe to its cash pay-outs. With four quarterly dividends totalling $0.21 (15.1p), this gives BP a dividend yield of 5.1%, roughly 1.5 times that of the wider FTSE 100 index.
BP resumed share buybacks, aiming to buy $500m of stock in this quarter. Going forward, the oil giant has committed to returning three-fifths (60%) of surplus cash flow to shareholders via share buybacks. This should boost future earnings per share. Or perhaps the BP share price slipped back on news that, due to various factors, it expects a cash-flow deficit in the second quarter? Then again, BP expects to generate surplus cash flow again in the second half of 2021.
Is £3 the new £5 for BP?
Despite these bumper results, BP faces an uncertain future. The world has fallen out of love with fossil fuels, BP’s main products for 113 years. Can BP produce healthy returns for current shareholders, while investing in renewable energy and low-carbon projects? Chief executive Bernard Looney thinks it can, but it’ll be a rough journey lasting decades. In the meantime, what next for the BP share price?
I see many positives for BP. Lower net debt, higher cash flow, and new share buybacks are all good news. Also, halving the dividend a year ago has freed up cash to invest in clean energy. But, in many ways, the BP share price is a hostage to the oil price. If Brent Crude barrels keeps gaining in value, then all well and good for BP. But if oil demand eases off, or production ramps up too quickly, then the oil price could decline. I wonder: is £3 the new £5 for BP?
On balance, and as an old-school value investor, I’d back the £60bn behemoth at the current BP share price. Indeed, I plan to buy below £3 for my family portfolio when I’m able…