BP signals confidence with share buyback as profit jumps
LONDON (Bloomberg) – BP signaled growing confidence the oil-industry downturn is coming to an end by starting to buy back shares issued to help cover its dividend during the price slump.
The company, which doubled third-quarter earnings from a year earlier on robust refining margins and rising production, also pared net debt for the first time in two years. The decision to initiate buybacks, which may cost as much as $400 million a quarter, underscores BP’s improving fortunes after seven tough years dominated first by the costly Macondo oil spill, then a collapse in crude prices.
“What the buyback signals is we’re back into a normality, having come through the headwinds of Macondo and the lower oil-price correction,” CFO Brian Gilvary said in a phone interview. “We will have to continue to manage the volatility that comes with this market, but we now have a base business that can balance itself at $49 a barrel.”
CEO Bob Dudley has spent much of the last seven years resetting the company following the Macondo well accident in the GOM that killed 11 people, caused the worst oil spill U.S. history and swelled BP’s liabilities to more than $60 billion. Crude’s collapse since mid-2014 only added to his problems as earnings across the industry slumped, projects were mothballed and debts soared.
BP’s net borrowings were $39.8 billion as of Sept. 30, a slight decline from three months earlier. Gearing, or net debt to capital, shrank to 28.4% from 28.8%. Both metrics are likely to drop in the fourth quarter as proceeds from asset sales come in, according to Gilvary.
“If there were any concerns about net debt, we wouldn’t be announcing buybacks today,” he said.
BP’s shares gained the most since March on Tuesday, rising as much as 4.1% to 522.2 pence before trading at 518.5 pence in London. Benchmark Brent crude was at $60.90/bbl, more than double its price early last year.
Cash Boost
Operating cash flow, excluding payments related to the 2010 oil spill, exceeded organic capital expenditure and dividends for the first nine months of the year. That’s a significant milestone for a company that piled on $17 billion of net debt to cover spending during the price slump. BP also used new shares to make a portion of payouts to investors during the period, and the buyback is intended to offset the dilutive effect of this.
Third-quarter profit adjusted for one-time items and inventory changes was $1.87 billion, double the $933 million posted a year earlier, the company said in a statement. That surpassed the $1.58 billion average estimate of analysts surveyed by Bloomberg.
“After three years of the downturn, the buyback is signaling the cost structure has adjusted,” said Jason Gammel, a London-based analyst at Jefferies LLC. “Depending on if oil stays at sustainable levels of $50, the industry is out of the worst. It’s a bonus with $60 oil.”
Earnings before interest and tax at BP’s downstream division, which includes refining, chemicals and trading, rose to $2.34 billion, the highest in five years. Upstream income, which covers oil and gas output, was $1.6 billion, compared with a $224 million loss a year earlier. BP produced 3.6 MMboepd, up 14% following the start of major projects in Australia, Trinidad and Oman.
The company’s global peers have also signaled a return to growth. France’s Total SA last week posted the highest profit from pumping oil and gas in more than two years, while Chevron and Exxon Mobil reported consensus-beating earnings, with the latter posting a 50% jump in net income.
