BP’s share price is up by more than 6% at the start of trading on Tuesday as the company reported stronger than expected Q4 profit levels, which has boosted sentiment towards the stock. Although 2023 full year profits were shy of estimates, the strong Q4 performance suggests that the company gathered steam at the end of last year, which is a good backdrop for 2024’s performance. There was good news on gas trading and its profitable convenience line, which saw gross margins soar, the company also jumped on the AI bandwagon.
BP the bargain stock?
All in, this mix has been welcomed by investors, and the stock price may also have been given a boost by activist investor Bluebell Capital Partners who said at the weekend that it believes BP’s share price is 50% undervalued compared to its peers.
Flush with cash
Reading BP’s financial market update is like a long list of excuses about why it couldn’t repeat 2022’s performance. However, false modesty aside, there was something for investors to like about this report. It posted underlying replacement cost profits of $13.8bn for the full year 2023, vs. $27.2bn for 2022, which was a bumper year for commodity flows and 2023’s profit level was higher than 2019 when profits were $9.9bn. Cash flow levels have, unsurprisingly, fallen alongside profit levels, but BP remains flush – it reported $32bn of operating cash flow for last year, and over $7bn in surplus cash flow.
Dividend and buyback boost attracts investors
BP delivered a 10% increase in its dividend in Q4 2023 compared with the year before, at 7.27cents, this had been 6.61 cents in Q4 2022. It also announced a $1.75bn share buyback. BP’s reliable dividend is rising again after falling sharply during the pandemic; however, it is not yet back at the pre-pandemic highs of 10.50 cents. Investors will be wondering when it will return to these levels, especially now some of the tech giants like Meta are also offering dividends and mega share buy backs, that make BP’s share buyback look like small change. However, BP has pledged to use 80% of its surplus cash flow on returning funds to investors, so this opens the door to the dividend returning to prepandemic levels in the coming quarters, which is also enticing for investors.
The forward outlook
Q4’s results saw lower refining margins, however, this was boosted by stronger gas trading revenues, which also boosted Shell’s profits, as oil trading weighed on profit levels. The forward outlook was in line with expectations. The oil major expects to deploy capital expenditure of $16bn per year for 2024 and 2025, which is in the middle of its prior guidance of $14-18bn. It also announced that it is planning to buyback shares worth $14bn through to 2025, as it commits to returning 80% of surplus cash flow to shareholders. Surplus cash flow was $7.8bn for 2023, so the $14bn figure could be conservative and there may be room for them to increase this assuming there is no nasty profit dip in the coming quarters.
BP: Back to focussing on hydrocarbons?
BP announced its new Seagull project, which will add 15,000 barrels of oil per day by 2025. It’s planning to expand its Gulf of Mexico projects, and it was awarded a new block in the Santos Salt Basin in Brazil. Interestingly, BP put its hydrocarbon updates well ahead of its low carbon updates in this earnings report. This could be a nod to activist investor Bluebell Capital Partners, who have pressured BP to slow its commitment to reducing oil and gas production levels as part of a greener future. Bluebell also believe that BP’s share price is 50% undervalued, so it’s no wonder BP’s c-suite have played down their low carbon future.
BP the coffee company
BP is not only pumping oil out of the ground, but its also pumping coffee. Its convenience store business is a behemoth that should not be underestimated, it delivered a record convenience store gross margin that was 9% for 2023. This is part of the business that should not be ignored, and BP sells more than 150 million cups of coffee each year at its retail sites. Its expanding its electric vehicle charging business in Spain and Portugal with a JV with Iberdola and it plans to invest EUR 1bn by 2025 and install 5,000 fast charging points.
BP jumps on AI bandwagon
BP has also jumped on the AI bandwagon. BP was a launch partner for Microsoft’s CoPilot for its Microsoft 365 product, and it plans to expand the use of this generative AI product across its sites. We doubt this led to BP’s share price rise, but it keeps BP on trend.
China shares bounce back as Beijing acts
Elsewhere, there has been a boost to market sentiment on Tuesday after a strong bounce back for Chinese shares. The Shenzhen Index rose by more than 6% on Tuesday and the Hang Seng was higher by 4% after the Chinese government put more pressure on institutions to actively buy Chinese stocks. How long this will last, we shall have to see, as it may not be a long-term solution to China’s share price decline, but for now this is helping to boost market sentiment and US futures are also pointing to a higher open in the US later today.
European stock indices are a sea of green today and Treasury yields have fallen after rising sharply in the last two sessions. The 2-year yield is lower by 2 basis points, while the 10-year Treasury yield is also down a notch after rising above 4% on Monday.
Euro could make a comeback if Chinese shares continue to recover
It’s also worth watching the FX space on Tuesday, the dollar surged to a three-month high on the back of reduced expectations of Fed rate cuts, and EUR/USD is down by more than 0.8% in the past week. However, strong German factory orders for December, which rose by 8.9%, has helped the euro to claw back earlier losses. Added to this, if the boost in Chinese shares is long-lasting, this could benefit European shares, since they can be a proxy for China, due to the economic links between Europe and the Asian powerhouse. Thus, we could see the euro continue to make up ground while Chinese shares rally.