BP Earnings: Repurchase Rate Reduced as Earnings and Cash Flow Decline

BP’s BP. first-quarter earnings fell from the year before although this exceeded market expectations; a stronger refining performance was unable to offset the impact of lower oil and gas prices. Underlying replacement cost profit fell to $5.0 billion from $6.2 billion a year ago while operating cash flow fell to $7.6 billion from $8.2 billion a year before. BP’s trading contribution was a mixed bag as well, as gas and marketing delivered an “exceptional” result while oil trading delivered a “very strong” result, but that was weaker than the “exceptional” result a year before. Production increased 3.4% to 2,330 mboe/d from the year before, but management expects full-year 2023 volumes to be broadly flat with 2022.

Given its return target (60% of surplus cash flow) and the decline in operating cash flow, BP reduced its second-quarter repurchase rate to $1.75 billion from $2.75 billion announced with fourth-quarter results and completed in April. Gearing fell below 20% during the quarter, but remains at the upper end of the peer group range.

BP shares have fared well in the wake of the announcement during fourth-quarter earnings to maintain oil production at higher levels for longer than previously expected. However, the buyback rate could fall further if oil and natural gas prices, and refining margins continue to weaken. Management reiterated it could buy back $4 billion annually assuming $60 per barrel, but this potentially lower amount is in contrast to financially stronger peers, who could maintain their repurchase levels in the face of lower commodity prices to take advantage of lower share prices. With our fair value estimate and no moat rating unchanged, shares appear fully valued.