BP buyback betrays lingering oil uncertainty

The balance

BP’s CFO says he can now “balance the books” with oil at $50 barrel, capping off what could be his least stressful quarter for seven years. The last nine months have certainly been the next best thing to plain sailing for BP, paid for by strenuous efficiency drives, cost cutting and deleveraging. They have also provided BP the opportunity to seek financial equilibrium elsewhere—an attempt to offset stock dilution from scrip dividends by equivalent share buybacks. BP is rather late to follow Royal Dutch Shell in scrapping scrips. The latter stopped offering pay outs in the form of shares in 2014. The device was common during the depths of the 2014-2016 oil price collapse that eviscerated cash flows. Now that cash balances are becoming better underpinned, scrips, which may in theory erode equity value, are less attractive.

No match

None of this means BP’s move is 100% essential now. It admits “The programme will not necessarily match the dilution on a quarterly basis”. The group will make an ongoing call, quarter-to-quarter, with an eye to “price environment”, business performance, finances and market factors. In other words, there’s no exact science to the exercise. Indeed, by Tuesday’s close, BP’s shares were up 13% since mid-August, erasing an earlier decline this year of a similar amount. Investors have been doing the maths, confirmed in Wednesday’s Q3 report. Capex remains within the year’s $15bn-17bn range; divestment proceeds of $1bn over 9 months are set to grow to $4.5bn by year end; and Gulf spill payments are beginning to come in smaller increments. That backdrop should support the bottom line in the event of another moderate oil price setback like the one CFO Brian Gilvary assumes will see crude trade back at $50-$55 a barrel in 2018.  If he’s right, BP profits will still settle into a pattern of modest growth, though perhaps not better.

Hanging back

That’s partly because whilst BP’s underlying production ramped 10.9% ramp in in the third quarter, like the majority of its giant rivals, it is hanging back on pumping significantly more oil due to obvious risks to prices. Underlying production growth for the year will be in low single digits or slightly negative for supermajors, according to consensus forecasts compiled by Thomson Reuters. On that basis, as BP’s cash surplus rebuilds, it will soon begin to burn a hole in its pockets from a shareholder perspective. The scrip recycling exercise will keep notoriously restive oil investors on side, whilst glacial growth and price uncertainty linger.

Tech spec

Long-term BP shareholders will see little surprise that Wednesday’s promising share price jump of more than 3% was later pared back closer to a 2% gain on the day. The stock remains bound by the same c.300p-520p range that has prevailed since the second quarter of 2010, in the wake of the Gulf of Mexico spill. Prices were capped on Wednesday just 2 pence above 520p, close to the 61.8% retracement marker of the April to end June 2010 collapse. Recent support has been found at prior resistance at 486p and this can certainly continue. Or, below there, investors are likely to eye previous resistance at 461p for potential, though as yet unproven, support. However, there’s little visible indication for now that the stock is ready to break higher than thresholds mentioned above. After recovering from the weakest share prices seen for a decade and a half, and some of the biggest challenges faced by any oil company, stagnation looks set to continue for BP and its shares.