BP shares open strong on reassuring Q3 results

BP shares jumped 2% immediately after the market opened this morning, erasing all of yesterday’s stock losses, after the company released positive third-quarter results.

The key ‘underlying replacement cost profit’ (RCP) measure which the oil exploration and production industry uses to gauge profitability amid a varying oil price fell 21.5% at BP in Q3.

This seems to be the primary negative element in the report.

The RCP fall seems to be very largely related to the situation surrounding BP’s Russian partner, Rosneft, in Ukraine and exacerbated by Western sanctions.

Apart from that hit, the rest of the report is quite encouraging; indicating that management have brought a number of other issues which analysts had been worried about, under control.

• Operating cash flow increased steadily this quarter at $9.4bn, compared with $6.3bn a year ago
• Capex also in line with the average run rate and no negative surprises– organic capital expenditure for full year to be around $23 billion, compared with previous guidance of $24-25 billion
• Net debt edges higher to $22.4bn from $20.1bn last year, I think in the round investors will look past this
• Rosneft income is weaker at $110 million compared with $808 million a year earlier, but again this had been well-flagged and is not materially worse than the picture the company already painted
• Upstream pre-tax RCP looks flat, but downstream is about double the amount of the year before
• Disposal programme on track with $4bn announced this morning toward $10bn cumulative by end 2015
• We like CEO Bob Dudley’s comments about underlying production growth in oil and gas and good downstream performance: “generated strong cash flow in Q3, despite lower oil price”… This keeps us well on track to hit our targets for 2014″. These are possibly the best comments he could make in the face of the collapse of the oil price over the last few months and the market ought to be reassured by them
• Whilst not a major near-term issue (due to the length of time we see for the final litigation to play out)  the fact that total cumulative pre-tax charge for Gulf of Mexico oil spill is still  $43bn ticks another box
• BP has gone the whole hog with the dividend: the market was expecting a 5.3% rise to 10 cents a share and that’s exactly what BP has delivered for Q3

Overall these are strong, if not stellar results, and very probably close to the best that BP could have expected to post under its current circumstances. On that basis, the stock can be expected to show some progress this morning, overall market momentum permitting.

BP shares should at least look to retake the ground lost a day ago, when they fell about 2%.

This would mean the shares continue to respect the channel they entered more than four years ago, which has seen the stock trade between circa 540p and 300p ever since.