BP’s share price was up 1.6% by Tuesday lunchtime despite the British energy giant posting a first quarter drop in profits. The oil and gas industry’s favoured profit measure is ‘underlying replacement cost profit’, which discounts extraordinary expenses such as the huge fines BP is still paying in relation to the 2010 Deepwater Horizon Gulf of Mexico spill. On that measurement BP’s profit over the first quarter was $2.4 billion, down from $2.6 billion in 2018. Analysts had anticipated $2.3 billion.
The drop in profits was mainly attributable to the lower than average price of a barrel of oil over the first three months of 2018 – $63 compared to $67 despite oil prices rising by around 30% since the beginning of the year. Lower refinery margins also played a role. Those factors were enough to offset gains achieved through higher output and better trading performance.
The company’s first quarter results were presented as a strong performance by chief executive Bob Dudley who pointed to results now coming through from major capital investments made last year. The biggest of those was the $10.5 billion the company paid BHP Billiton for its U.S. shale fields. Six new oil and gas production sites were also brought into operation. These new assets helped lift overall oil and gas production by 2% on the same period last year. BP’s stake in Russian oil giant Rosneft is not included in the company’s oil and gas production figures.
Mr Dudley took over the reins at BP in the wake of the Deepwater Horizon rig explosion and oil spill catastrophe in 2010. The early years of his time at the helm were focused on selling off assets to pay for the huge fines the company incurred as a result. However, BP has now largely come through that sticky patch to return to growth.
We yesterday covered a survey of fund managers that showed general negativity around the prospects of oil and gas companies that remain focused on fossil fuels over the next decade.
BP is not, it has to be said, currently one of the most proactive investors in renewable energy among the ‘big oil’ companies. Its investment approach towards renewables has been cautioned since it was burned by major investments into the solar panel industry. It currently sets aside an annual $500 million out of its $15 billion capital investment budgets for renewables. In contrast, London-listed rival Shell invests $2.5 billion of its own $25 billion capital expenditure budget.
However, despite those concerns, a recent Motley Fool article does paint a positive picture for BP shares. While slightly favouring Shell between the two, analyst G A Chester writes:
“…BP’s value credentials are pretty strong in their own right. The P/Es are very reasonable, the PEGs are comfortably to the good value side of the PEG ‘fair value’ marker of 1, and the dividend yields are well above the Footsie average, and only a tad lower than Shell’s”.