Fuelling growth: BP’s strategic momentum in a strong market

With brent crude breaking to a four-month high this week, we’re turning our attention to BP (BP.) which has high-quality financials and plenty of bullish momentum.

The IEA anticipates a 1.3 million barrels per day increase in oil demand for 2024, reflecting a rise of 110,000 bpd compared to the previous month but remaining below the 2.3 million bpd growth seen last year. Additionally, the IEA adjusted its 2024 supply forecast downward, now expecting oil supply to climb by 800,000 bpd to reach 102.9 million bpd this year.

Whilst headline revenue declined, the company’s profitability metrics remain strong. For example, BP’s operating margin and return on capital employed (ROCE) have remained solid at 11.8% and 12.8% respectively, reflecting its operational efficiency and effective cost management.

Furthermore, BP’s strong cash flow generation capabilities have enabled it to sustain dividend payments and undertake strategic investments while maintaining a healthy balance sheet.

BP paid a dividend of 28.6p (4.57%) last year (FY23), this is expected to rise to 30.4p (4.86%) this year (FY24) and 32.4p (5.18%) the year after (FY25). These payouts are comfortably covered in excess of 2x forward earnings.

BP’s share buyback program

Another highlight in BP’s recent trading update was the announcement of a $14 billion share buyback program.

The buyback plan, spanning over several years, demonstrates management’s confidence in BP’s intrinsic value and its commitment to enhancing shareholder returns. This significant repurchase initiative not only signals BP’s belief in its future prospects but also indicates its intention to deploy excess cash in a manner that benefits shareholders.

By reducing the number of outstanding shares in the market, BP effectively boosts its earnings per share (EPS) and return on equity (ROE), increasing shareholder value. This news has been positively received by investors, contributing to the upward momentum in BP’s share price.

BP’s expansion in oil and gas production

In 2023, BP embarked on a significant expansion journey by initiating four major oil and gas production projects. BP anticipates these projects to play a pivotal role in achieving its target of around 200 thousand barrels of oil equivalent per day (mboe/d) from ten new major projects by 2025.

Each of the four projects initiated by BP represents a significant milestone in the company’s expansion strategy:

• Mad Dog Phase 2: Located in the US Gulf of Mexico, the Mad Dog Phase 2 project commenced operations in April 2023. This deepwater oil project features a new semi-submersible floating production platform capable of producing up to 140,000 gross barrels of crude oil per day. The project is poised to achieve peak annual average production of approximately 120 thousand barrels of oil equivalent per day (mboed).

• KG D6 MJ: The MJ project, part of Block KG D6 development off the east coast of India, started production in June 2023. Operated by Reliance with BP as a partner, the project aims to tap into conventional gas resources, with peak annual average production projected at around 90 mboed.

• Tangguh Expansion: Located in Indonesia’s Papua Barat Province, the Tangguh Expansion project focuses on LNG production capacity enhancement. With BP as the operator the project expanded the existing LNG facility’s capacity to 11.4 million tons per annum. The addition of a third LNG process train and supporting infrastructure positions the project for peak annual average production of approximately 125 mboed.

• Seagull: The Seagull project, situated in the Central North Sea, commenced production in November 2023. Operated by Neptune Energy in collaboration with BP and JAPEX, the project targets conventional oil resources. With tie-back to existing infrastructure and strategic offloading arrangements, Seagull is expected to achieve peak annual average production of around 30 mboed.

Strategic investments beyond oil and gas

Unlike Shell, BP has made significant strategic investments beyond traditional oil and gas operations. The company’s ventures into renewable energy, electric vehicle infrastructure, and innovative technologies align with broader industry trends towards decarbonisation and energy transition.

These strategic initiatives not only mitigate risks associated with fossil fuel dependency but also tap into new revenue streams and growth opportunities.

In summary, the combination of multiple catalysts, including a tightening oil market, BP’s share buyback program, strong financial performance, and strategic investments beyond oil and gas, collectively contribute to the attractiveness of BP as a high-quality value and income play.