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May 27, 2024

BP Profits Halve But Q4 Beats Expectations As Buybacks Accelerate

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Feb 6, 2024

BP saw its annual profits halve in 2023 due to lower oil and gas prices and weaker refining margins, however beats expectations in the fourth quarter. The oil major has announced an acceleration of its share buyback program up to $2.75 billion by early 2025.

Annual Profits Drop On Lower Energy Prices

BP reported full-year 2023 underlying replacement cost profit, its definition of net earnings, of $12.8 billion, down from the record $27.7 billion it made in 2022. This drop was largely driven by significantly lower energy prices through 2023 compared to the highs seen after Russia’s invasion of Ukraine.

The average Brent crude oil price dropped to $95 per barrel in 2023 from $102 in 2022. Lower oil and gas realizations accounted for around $6 billion of the profit decline according to the company. Meanwhile, weaker refining margins, especially for diesel, knocked another $4.5 billion off earnings.

Key Figures 2023 2022 Change
Underlying RC Profit $12.8 billion $27.7 billion -54%
Average Brent Crude Price $95/barrel $102/barrel -7%
Net Debt $21.4 billion $26.5 billion -19%
Dividends $0.09/share $0.06/share +50%

BP CEO Bernard Looney said that 2023 was a year of “two halves” with a very strong first half but a more challenging second half. However he highlighted that BP continues to perform while transforming into an integrated energy company, paying down debt and boosting shareholder returns.

Share Buybacks To Accelerate By $2.75 Billion

Despite seeing profits slide for the full year, BP surprised by significantly beating fourth quarter profit expectations. The company generated $4.8 billion in underlying replacement cost profit for the quarter compared to analyst expectations nearer $3.5 billion.

This performance has led the company to announce a further $2.75 billion of share buybacks, accelerating the pace to $4 billion for the first half of 2023. BP is aiming to have completed the $25 billion buyback program announced in 2021 years ahead of schedule, now targeting early 2025 rather than 2025-2030.

Bernard Looney stated: “We are committed to strengthening bp, with a strong focus on returns and a disciplined financial frame. Surplus cash gets returned via buybacks and as we reduce debt, an increasing proportion flows directly to shareholders.”

Continued Progress On Debt Reduction And Returns

As well as accelerating buybacks, BP also announced an increased fourth quarter dividend of 6.006 cents per ordinary share, a 10% rise on the previous quarter. This takes total dividends for 2023 to 21.987 cents per share, a rise of around 15% year-on-year.

BP continues to rapidly strengthen its balance sheet, reducing net debt by $5.1 billion over 2023 down to $21.4 billion. This was aided by strong cash flow generation and proceeds from divestments. The divestment program has now reached $15 billion since the start of 2021, already surpassing the target $14-15 billion.

CFO Murray Auchincloss said on this progress: “We expect to continue deleveraging our balance sheet in 2024, with further divestments targeted. Surplus cash remains focused on share buybacks, with flexibility to repurchase up to 60% of surplus cash as we aim for $25 billion by 2025 and now expect to complete by 1Q25.”

Performance By Division

BP’s various divisions saw diverging fortunes through 2023, impacted significantly by the challenging global energy market environment.

The crucial Exploration & Production (Upstream) division generated $3.2 billion in underlying annual profit, a 75% slide from the $12.8 billion made in 2022. As mentioned previously, this was predominantly down to weaker average oil and gas prices.

Refining & Trading (Downstream) flipped to a loss for the year of $2.3 billion from a $7 billion profit in 2022. Diesel margins came under intense pressure, especially in the US, leading to the division’s worst performance in over 15 years.

However, Gas & Low Carbon Energy managed to increase profits by 28% to $6.2 billion for 2023 despite lower LNG prices, aided by the contribution of the Archaea Energy biogas acquisition.

Meanwhile Marketing also increased underlying profit 36% to a record $4 billion, underpinned by higher convenience volumes and margins.

Outlook For 2024 Cautiously Optimistic

Looking ahead, BP remains guarded given the uncertain economic backdrop and volatility facing the energy sector. However the company believes 2023 may prove a cyclical bottom.

Most forecasts expect lower oil supply growth in 2024 while demand continues to recover back towards 2019 levels. As such, Brent futures remain firmly above $80/barrel even through recent market weakness.

If commodity markets do tighten as expected, BP’s upstream production can strongly leverage additional value. The company maintains operations across every major basin and has sanctioned fast-payback projects focused on its best acreage. Exploration success also continues with Guyana and Oman additions over 2023.

Furthermore BP’s strengthened downstream business leaves it well placed to benefit should refining margins partially recover. While structural change continues, management highlighted that absolute margins remain below mid-cycle levels.

The company therefore believes it can continue reducing net debt to $15-20 billion in 2024-2025 while sustaining buybacks at least $4 billion each year. With such financial discipline and improved visibility, BP seems on course to deliver sustainable value growth as the energy transition evolves.

What The Analysts Are Saying

  • “BP has started 2024 strongly, beating expectations with these results” said Victoria Scholar, Head of Investment at Interactive Investor

  • “While commodity markets remain volatile, BP continues reducing debt while funneling surplus cash to shareholders” stated Morgan Stanley analyst Martijn Rats

  • “If the currently supportive oil market backdrop persists, BP offers among the highest potential total returns in our European Integrated Oil coverage” noted Barclays analyst Lydia Rainforth

  • “BP joins Shell in posting forecast-beating numbers underlining the sector’s ability to churn out bumper profits after last year’s energy crisis” wrote Susannah Streeter, Senior Investment & Markets Analyst at Hargreaves Lansdown

  • “BP is repaying the faith placed in it by shareholders with generous returns via both dividends and buybacks” said Danni Hewson, AJ Bell Financial Analyst

What Next For BP

BP remains focused on continuing its financial frame progress into 2024 an beyond. This centers on sustaining buybacks around $4 billion per year to 2025, reducing net debt to $15-20 billion in 2024-2025 timeframe, and keeping the dividend resilient around 40% of surplus cashflow.

Commodity price uncertainty persists as does global recessionary pressure. However management believes the company can maneuver in the current environment to keep strengthening its balance sheet. A premium asset base, refocused organization structure and disciplined capital allocation leaves BP well placed strategically.

If the macro backdrop improves along with supply-demand balances, significant upside exists to cash generation and therefore shareholder returns. But regardless of external volatility, BP has shown over 2023 it can deliver on its promises in a turbulent era for energy markets.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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