BP: Strong Performance Seen Continuing In 2018

Summary

• BP announced first-quarter underlying replacement cost profit, which is utilized as a substitute for net profit, of $2.586 billion well over the $2.2 billion forecasted, according to a company-provided survey.
• Production for the quarter was 2,605K Boe/d (not including Rosneft), 9.1% higher than the first quarter of 2017.
• With the economic frame continuing to strengthen along with bullish oil prices, the company is set to outperform its peers in 2018.

Investment Thesis

BP Plc (NYSE:BP) is one of my selected oil super-majors that you can add to your oil stocks basket with total confidence. The company is shining a light of excellence, with underlying profits that have more than doubled year over year, and it has achieved a substantial success from its upstream and downstream segments as the first quarter results are again confirming.

Furthermore, BP is one of the most promising oil majors viewed from an investor's perspective, because the Macondo litigation is finally unclasping its detrimental financial embrace. With the economic frame continuing to strengthen along with bullish oil prices, the company is set to outperform its peers, assuming that optimistic oil prices over $70 per barrel continue unabated in the future.

Brian Gilvary - the Group CFO & Exec. Director said in the conference call:

Following a year of strong delivery and growth in 2017, we've had a good start to this year. Underlying profit for the first quarter of $2.6 billion grew by 23% relative to the previous quarter and 71% versus the same quarter last year, making this the strongest quarter for three years.

Note: Gulf of Mexico oil spill payments in 2017 were $5.2 billion, compared with $6.9 billion in 2016.

Author's Note: I have already commented on four other oil majors recently:

• Royal Dutch Shell (RDS.A) (RDS.B), please read my article here.
• Statoil (STO), please read my article here.
• Exxon Mobil (XOM), please read my article here.
• Chevron (CVX), please read my article here.

BP data by YCharts

BP - Financial Table: The Raw Numbers

BP PLC.	1Q'15	2Q'15	3Q'15	4Q'15	1Q'16	2Q'16	3Q'16	4Q'16	1Q'17	2Q'17	3Q'17	4Q'17	1Q'18
Total Revenues and other income in $ Billion	56.24	63.20	57.30	49.23	39.17	47.28	48.04	52.12	56.39	57.37	60.81	70.02	69.14
Net Income in $ Billion	2.60	-5.82	0.05	-3.31	-0.58	-1.42	1.62	0.50	1.45	0.14	1.77	0.03	2.47
EBITDA $ Billion	6.49	-3.68	5.23	0.86	3.42	0.94	5.95	4.00	6.68	5.96	7.59	7.31	8.82
Profit margin % (0 if loss)	4.6%	0	0.1%	0	0	0	3.4%	1.0%	2.6%	0.3%	2.9%	0.0%	3.6%
EPS diluted in $/share	1.37	0.30	1.09	-0.31	-0.39	-0.78	0.68	0.22	1.41	0.77	0.53	0.01	0.74
Operating Cash flow in $ Billion	1.86	6.29	5.18	5.81	1.87	3.88	2.51	2.43	2.11	4.89	6.02	5.90	3.65
Capital Expenditure Quarterly in $ Billion	4.64	4.53	4.36	5.13	4.38	4.28	3.38	4.66	3.82	4.18	4.14	4.42	3.59
Free Cash Flow in $ Billion	-2.78	1.76	0.83	0.68	-2.51	-0.40	-0.87	-2.23	-1.71	0.71	1.89	1.48	0.06
Total cash $ Billion	30.09	32.74	32.88	31.95	23.20	23.62	25.57	23.53	23.83	23.35	25.86	25.71	22.36
Gross Debt in $ Billion	57.73	57.10	57.40	55.00	54.01	55.73	59.00	58.30	61.83	63.00	65.78	63.23	62.19
Dividend per share in $	0.60	0.60	0.60	0.60	0.60	0.60	0.60	0.60	0.60	0.60	0.60	0.60	0.60
Shares outstanding (diluted) in Billion	3.06	3.06	3.06	3.06	3.11	3.13	3.15	3.24	3.28	3.29	3.31	3.30	3.34

Click to enlarge

Sources: Company filings and Morningstar

Trends and Charts: Revenues, Earnings Details, Free Cash Flow, and Upstream Production

1 - Quarterly total revenues and other investment

BP Plc announced its earnings first-quarter results. BP Plc had total revenues of $69.14 billion for the quarter, beating analysts' estimate. Earnings after taxation, or underlying net profit, jumped to $2.586 billion in the first quarter from a year earlier.

BP takes an extra $1.7 billion charge related to the Deepwater Horizon oil spill, bringing the total cost above $65.1 billion. The company also increased its estimate for cash outflows related to Deepwater Horizon in 2018, raising it from just over $2 billion to now $3 billion. I have commented on this subject here.

BP also paid another $1.6 billion for costs arising from the 2010 Gulf of Mexico oil spill catastrophe this quarter, which includes $1.2 billion for the final payment made to the 2012 Department of Justice settlement.

2 - Free Cash Flow (not including divestitures)

BP expects the pace of divestments to slow in 2018. It realized $3.4 billion from selling assets in 2017, and that's anticipated to drop to below $3 billion in 2018.

Note: Total divestments and other proceeds in 2017 were $4.3 billion.

Free cash flow for BP is positive on a yearly basis and represents $4.14 billion (excluding divestitures). The company's free cash flow for the first quarter was $60 million.

Evaluating free cash flow is a necessary exercise when looking at a long-term investment perspective. It is crucial that FCF is adequate and sufficient to consider the business model stable. Consequently, it should be enough to pay the dividend, reduce debt, and eventually declare a share buyback.

BP continued with its share buyback program through the quarter. Since the company restarted the buyback program in the fourth quarter of 2017, it has repurchased 69 million shares at a total cost of $460 million. The company bought back 18 million shares through the first quarter, at the cost of $120 million.

The annual dividend is now $2.40 per share or ~5.3% annually. Based on 3.34 billion shares outstanding diluted, it is a cost of $8 billion per year, which is higher than the free cash flow ("TTM").

3 - Oil production (Upstream + Rosneft)

Oil Production K Boe/d	1Q'15	2Q'15	3Q'15	4Q'15	1Q'16	2Q'16	3Q'16	4Q'16	1Q'17	2Q'17	3Q'17	4Q'17	1Q'18
Oil Equivalent Production in K Boe/d	2,307	2,112	2,242	2,369	2,428	2,212	2,116	2,186	2,388	2,431	2,462	2,581	2,605
Production Rosneft in K Boe/d	1,027	1,017	1,003	1,028	1,029	1,030	1,030	1,152	1,142	1,126	1,120	1,129	1,127
Global liquid price ($/boe)	37.00	40.04	33.25	29.54	22.57	28.66	29.46	31.40	37.19	33.59	33.23	37.48	41.39
Global Natural gas price ($/Mbtu)	4.44	3.80	3.49	3.47	2.84	2.66	2.77	3.08	3.50	3.19	2.89	3.23	3.78

Click to enlarge

Production for the quarter was 2,605K Boe/d (not including Rosneft), 9.1% higher than the first quarter of 2017. Underlying output for the quarter increased by 13.8%, due to the ramp-up of significant projects. The first-quarter reported production reflects the sixth consecutive quarter of growth as well as the highest output since the fourth quarter of 2010.

Compared to the fourth quarter of 2017, the improvement in earnings indicates higher liquids and gas realizations and higher production in the Upstream segment.

In the Downstream, lower industry refining margins were more than offset by the benefit from higher Canadian heavy crude oil discounts, lower costs, and a lower level of turnaround activity.

The company had started significant projects or brought online recently:

• Three start-ups in Zhor Egypt, Trinidad, and the North Sea. We learned today that BP begins production from Egypt Atoll's gas field seven months ahead of schedule. On 12 February 2018, BP announced the start of gas production from the Atoll Phase One project (BP 100%), offshore Egypt. Atoll is BP's first major project to start in 2018.
• In July 2017, with Persephone in Western Australia. The project is expected to produce ~50 K Boe/d.
• In August 2017, BP's first subsea field development in Trinidad, called Juniper, came online. Expected to produce ~95 K Boe/d.
• On September 25, 2017, BP began production from the giant Khazzan gas field in Oman which is BP's most significant 2017 start-up. Phase One of a significant tight gas project to deliver 1 Bcf/d gas to Sultanate of Oman. On 9 April 2018, BP announced that, together with its partner the Oman Oil Company Exploration & Production, it had approved the development of Ghazeer (BP operator 60%, Oman Oil Company Exploration & Production 40%), the second phase of the Khazzan gas field in Oman.
• Aker BP acquired the Hess (HES) in a $2 billion deal. Please read my article here.
• On 12 February 2018, BP confirmed that the governments of Mauritania and Senegal signed an Inter-Government Cooperation Agreement which will enable the development of the BP-operated Tortue/Ahmeyim gas project to continue to move towards a final investment decision.
• In February 2018, BP took final investment decisions on the two new North Sea developments, Alligin (BP operator 50%, Shell 50%) and Vorlich satellite fields (BP operator 66%, Ithaca Energy 34%).
• On 12 April 2018, BP and state-owned Brazilian oil company Petrobras (PBR) announced the signing of a memorandum of understanding to form a strategic alliance to explore potential business opportunities both in Brazil and beyond jointly.
• On 19 April 2018, BP together with its partner Reliance Industries Limited, announced the sanction of the Satellite Cluster project. The second phase in the development of new deepwater gas fields in Block KG D6 (Reliance Industries Limited operator 60%, BP 30%, and NIKO 10%) off the east coast of India.
• On 26 April, BP and the State Oil Company of the Azerbaijan Republic (SOCAR) signed a new production-sharing agreement* for the joint exploration and development of Block D230 in the North Absheron basin in the Azerbaijan sector of the Caspian Sea. The deal is expected to be ratified by the Azerbaijani parliament before the summer recess.

Note: The initial public offering of BP Midstream Partners (BPMP), a wholly owned subsidiary of BP Plc (59.4%), in the U.S. delivered net proceeds of over $700 million.

BPMP data by YCharts

Finally, BP is now reinvesting in solar, which is a reliable addition to the company's wind and biofuels businesses in its alternative energy portfolio. Please read my article about this segment and the recent deal it made with Tesla (TSLA) in the USA.

According to BP website, BPWE operates, owns, or is involved (operating partner or non-operating partner) in eight U.S. States representing a total of 1,203 turbines and a production of 2,263 MW. Please see graph below.

BP has one of the largest operated renewables portfolios among our peers. The company continues to invest in emerging new businesses and technologies to ensure that the company "stay at the forefront of changing global needs in the energy transition" Robert Dudley noted in the conference call.

Note: The company expects a lower production in 2Q'18 reflecting the expiration of the Abu Dhabi offshore concession and seasonal turnaround and maintenance activities.

4 - 2018 Production outlook unchanged

In 2018, BP expects underlying production growth of between 5% and 7%.

BP expects organic CapEx in 2018 to be $12 billion to $13 billion, below the company guidance while maintaining growth targets. Pre-tax free cash flow growth in 2018 will be higher than 2017 without any help from the oil price.

5 - Net debt

Net debt is now $37.8 Billion with a net debt-to-EBITDA ("TTM") ratio of ~1.27. Net debt was slightly down from nearly $38 billion in 1Q'17.

The debt-to-EBITDA ("TTM") ratio is signaling that BP's debt is appropriately covered by operating cash. However, I will be happy if the company can continue to reduce the net debt in 2018 and end below $34 billion.

Commentary And Technical analysis

BP did quite well this quarter, compared to its peers, but reached a top recently around $45. BP profits surge 71% oil prices rally. The company beat analyst expectations on May 1st, as higher crude prices and rising production levels helped to boost a recovery in one of Europe's largest oil and gas companies. The first-quarter production rose to 3,732K Boe/d, up 5.7% from the previous year.

BP announced first-quarter underlying replacement cost profit which is utilized as a substitute for net profit, of $2.586 billion well over the $2.2 billion forecasted by analysts.

The latest numbers come at a time when the climate for oil supermajors is increasingly improving. Plenty of evidence that the energy market is rebalancing, while crude futures have rallied to multi-year highs.

Looking at the chart, we see BP trading within a channel pattern between $45 new resistance (sell flag) and $39 support (buy flag).

Author's note: Do not forget to follow me on the oil sector. Thank you for your support, I appreciate it. If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks!

Analyst’s Disclosure: I am/we are long BP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.