BP: Another Must-Have Energy Stock?

About: BP p.l.c. (BP)
by: Gaurav Agnihotri

BP almost doubled its net profit in 2018.

Upstream business did exceptionally well.

The company's downstream business was supported by higher refining volumes.

BP plc (BP) released its fourth-quarter and full-year 2018 earnings on February 5, 2019, which turned out to be better than market expectations. Just like Royal Dutch Shell (RDS.B, RDS.A) and Exxon (XOM), I strongly believe that BP is another energy stock that new investors must have in their portfolio. Being an integral part of the "Big Oil" group, the company operates in more than 80 countries with interests in lubricants, fuel and petrochemicals. Let us analyse its latest results to gain more insights on the stock.

BP's net profit doubles in 2018

YoY in $Billion

(Image Source: BP earnings results)

BP reported a replacement cost profit (a proxy for net profit) of $12.7 billion for year 2018, which was almost double when compared to 2017. This is something that will really attract new investors.

YoY in $Billion

(Image Source: BP earnings results)

Another major development was the company’s operating cash flow (excluding Gulf of Mexico oil spill payments), which increased from $24.1 billion in 2017 to $26.1 billion in 2018.

Upstream business continues to do exceptionally well

(Image Source: BP earnings results)

Investors must note that BP’s upstream business did exceptionally well even in 2017, when seven of its major projects came on-line. In 2018, its upstream production (excluding Rosneft) increased by 3% on a yearly basis, with 6 major projects coming on-line. These projects were in the North Sea, Egypt, Australia, Gulf of Mexico, Russia and Azerbaijan. The replacement cost profit for upstream increased from $5.2 billion in 2017 to a massive $14.32 billion in 2018.

Investors must note that rising upstream volumes, better liquids and gas realizations, low exploration write-offs and BP’s $10.5 billion acquisition of BHP’s shale assets supported this upstream growth. Moreover, the upstream business reported an exceptionally strong fourth quarter result (refer the below table) at a time when oil prices were falling. This means that the company’s upstream business remained unaffected by oil price volatility.

(Image Source: BP earnings results)

Downstream business records good year-on-year growth

(Image Source: BP earnings results)

The downstream business consists of BP’s Fuel, Lubricant and Petrochemical business. The Fuel business (which is the biggest part of BP’s downstream business) reported a replacement cost profit of $5.6 billion in 2018 when compared to $4.8 billion in 2017. These results highlight the company’s efforts in strengthening its "convenience partnership model" (which is present in more than 1400 sites globally) and in achieving higher refining volumes.

BP’s stake in Rosneft in an excellent strategic move, while its Alternative Energy business still has to grow

In my opinion, BP’s 20% stake in Rosneft was an excellent strategic move, as this made it beneficiary to a wide range of opportunities in Russia and other developing markets.

(Image Source: BP earnings results)

However, the 4Q18 numbers were affected by low oil prices (refer the above table). Even BP’s Alternative Energy Business witnessed a decline, as the company divested some of its wind facilities in Texas.


Looking at the larger picture, one must note that BP managed to post its highest annual profit in last five years. The company announced a fourth-quarter dividend payout of 10.25 cents per share, with an increase of 2.5% compared to last year. Besides, BP has a strong dividend yield of 5.8%, which is slightly less when compared to that of Royal Dutch Shell.

“We now have a powerful track record of safe and reliable performance, efficient execution and capital discipline. And we’re doing this while growing the business - bringing more high-quality projects online, expanding marketing in the Downstream and doing transformative deals such as BHP. Our strategy is clearly working and will serve the company and our shareholders well through the energy transition,” said BP’s Chief Executive Bob Dudley during the company’s fourth-quarter earnings release.

Looking at the above financial figures and analyzing other key highlights, it can be said that the company’s strategy is indeed working in its favor. With its strong operating cash flows and rising upstream - refining volumes, BP is one energy stock that new investors must buy and hold for long term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.