BP tops strong quarter for oil giants

BP is beginning to stand out in an uncertain oil world.

Beyond Rosneft

With shares set for their best day in about 2½ years investors are signalling BP went above and beyond. After rivals sailed past forecasts to report muscular quarters despite the late-2018 price rout, impressing like this is quite a feat. Indeed, beyond doubled annual profit of $12.7bn vs. $11.88bn forecast, with output cranked by BHP’s U.S. shale fields, promising signs abound. For instance, stripping out BP’s 20% stake in the Russian group, which historically has come with regulatory and political baggage, BP output was up 8.2% on the year, and total 2019 production is forecast to be “higher” again.

Fine tuned

It also appears investors are prepared to tolerate net debt rising from $37.8bn to a more-than-forecast $44bn. Gearing also rose: 2.9 percentage points to 30.3%. The key to this tolerance could be continued signals that BP’s $15bn to $17bn annual capex goal is here to stay. A forecast that gearing will move to the middle of the 20%-30% range in 2020 may also be helping. As such, the overall impression is that BP’s efficiencies are sitting even better than those of close rivals like Exxon and Shell. The group reported a return on average capital employed of 11.2% for the year, a big bump up from 5.4% in 2017 and pulling away from a 7% median of best-matched peers.

Discount in focus

Ahead, the group contends with the impact of Rosneft’s links to Venezuela as well as the unreliable price outlook. “Cost deflation” in certain U.S. assets could provide another buffer. But risks to forecasts in the current year are obvious, particularly with production expected to rise “significantly”. Even then, $10bn in divestments over the next two years offers a decent chance that Monday’s share price advance will be extended. Whether or not it’s truly time to erase BP’s book value discount to Exxon is tough to say. Still, such anomalies are becoming more difficult to justify.