BP: Bumper Returns, but Possibly Too Much Too Soon

Written by: Nicholas Hyett | Hargreaves Lansdown

BP reported third quarter revenues of $37.9bn, up 44.2% year-on-year driven by higher oil & gas prices.

Write-downs in the value of derivatives used to hedge against an oil price fall meant reported profits fell to a $2.9bn loss. However, excluding that underlying profits came in at $3.3bn, up from $86m last year.

The group announced a third quarter dividend of 5.46 cents per share, a 4% increase year-on-year. The group also announced plans to buy back $1.25bn of shares before the end of the year, following a $1.4bn buyback announced at the half year.

BP shares fell 1.4% in early trading.

“BP’s third quarter results show that oil & gas remains a lucrative business. High prices have driven strong year-on-year growth in profits, and that’s being used to fund a generous $1.25bn share buyback. Coming on top of a $1.4bn buyback announced at the half year stage the group is firmly focused on shareholder returns at present.

However, you can reasonably question whether that generosity is justified. While still low by historic standards gearing rose modestly in the quarter, and the group only reported surplus cash generation of $933m (less if you discount cash from disposals). Unless the fourth quarter turns out to be even better than this it’s likely gearing will rise again.

Generosity in good times is all well and good, but that shouldn’t come at the expense of long term financial stability – particularly given the considerable spending on renewable and low carbon projects that’s likely over the coming years.”

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