BP (LSE: BP) released second-quarter results Tuesday, giving the oil giant a boost. The BP share price picked up 5.6% on the day. At around 307p, we’re still looking at a 9% fall from a June high of 337p, mind.
Still, BP is back in profit. After being punished with an $18.3bn loss for the equivalent period last year, BP recorded a replacement cost profit of $5.7bn for the first half of 2021. Operating cashflow looked a lot better too, at $11.5bn, against last year’s $4.7bn.
The oil price will have figured prominently among the drivers of this change in fortune. A year ago, a barrel of Brent Crude sold for around $44, and had dipped even lower by November. Today, you’d have to pay $73. Will that last? In the past, I had considered something around $75 to be sustainable, and a level at which I’d be comfortable holding oil stocks. Today, I’m less confident, largely with the long-term outlook for hydrocarbon consumption under increasing pressure.
And then we have BP’s push for net-zero emissions, announced last year during the depths of the stock market crash. Shell joined in too, pretty much inevitably. But it does create uncertainty in the industry that’s unlikely to be resolved for several decades. How much that uncertainty might hold back the BP share price is hard to guess.
Balance sheet and debt
Cost-cutting and divestments have greatly improved the BP balance sheet. Net debt, which stood at $40.9bn at the end of the first half in 2020, is now down to $32.7bn. That’s impressive progress, but it doesn’t take much to remind me it’s still a huge sum.
The company itself seems upbeat. Chief executive Bernard Looney said: “Based on the underlying performance of our business, an improving outlook for the environment and confidence in our balance sheet, we are increasing our resilient dividend by 4% per ordinary share and in addition, we are commencing a buyback of $1.4 billion from first half surplus cash flow.”
He reckons that if oil averages around $60 per barrel, the company should be able to “deliver buybacks of around $1.0 billion per quarter and to have capacity for an annual increase in the dividend per ordinary share of around 4%, through 2025.”
BP share price value
I invest mainly for dividends these days so, on the face of it, I should be happy with that. The trouble is, I’m increasingly coming round to wanting to see companies pay down more of their debt before making big returns to shareholders. Yes, I want my companies to pay me handsome returns. But no, I don’t want them to borrow money to hand to me. And that’s effectively what a company’s doing when it shoulders massive debts while insisting on making the biggest shareholder returns it can.
Still, saying all that, I think the BP share price probably represents decent value now. And I suspect that investors buying today will do well from it. But I’ll stick with my strategy of not investing in companies carrying big net debt.