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Stock Analyst Update

BP Announces Share Buyback Program

We increased our fair value estimate after news of the program that will cover scrip dilution.


In a positive development, in its third-quarter earnings release,  BP announced a share-repurchase program to cover the dilutive effect of its scrip starting in the fourth quarter of 2017. The announcement demonstrates the progress BP has made in reducing its break-even price to about $50/barrel for 2018. While the decision lacks the conviction of fully restoring the cash dividend, it does preserve flexibility in the event oil prices do not hold above $45/bbl, a level down to which management seems confident it can still repurchase the necessary shares. Management also indicated some investors prefer the efficiency of a scrip dividend option. However, in the long term, we’d expect a restoration of the full cash dividend along with potentially accretive share repurchases as BP’s break-even level trends below $50/bbl in the coming years and oil prices rise. This price excludes Gulf of Mexico payments, which BP plans to fund with asset sales proceeds. While totaling $5.5 billion this year, they should become more manageable as they fall to about $2 billion next year and to $1 billion a year in 2019 and beyond.

BP's operating results were strong in the third quarter of 2017. Underlying profits grew $1 billion to $1.9 billion compared with last year. On the upstream, 11% higher production volumes from major project ramp-ups and increased price realizations more than offset higher depreciation and amortization charges. Refining and marketing results doubled compared with last year, as higher refining margins outweighed smaller crude differentials in the U.S.

We updated our analysis with third-quarter results, slightly lower full-year capital expenditures, and improved up- and downstream earnings. As a result, we increase our fair value estimate to GBX 475/$38 from GBX 465/$36. Our moat rating remains unchanged at no-moat.

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Allen Good does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.