BP p.l.c.(NYSE:BP) just delivered another sterling quarter which should put to rest any doubt on BP's ability to compete alongside the other Supermajors. BP has not only put the Gulf of Mexico (GOM) oil spill in its rearview mirror but also is halfway through an ambitious 5-year plan to boost growth and position the company for the future.
For Q2 2019, BP generated an operating cash flow growth, excluding GOM oil spill payments of $8.2 billion vs. $6.0 billion the previous quarter, of 37%. A dividend of $0.615 per ADS was also declared, providing a yield of approximately 6.5%. From a strategic perspective, BP has brought online 4 out of the 5 projects scheduled for this year, delivering two-thirds of the 900,000 barrels per day production promised by 2021. On the Downstream segment, BP is on track to deliver the $3 billion earnings promised by 2021, with fuels marketing leading the way with a 15% growth for the first half of this year.
In March of this year, BP had taken full control of the shale assets it bought from BHP (NYSE:BHP). BP is anticipating $240 million in synergies to be delivered in comparison to the initial estimate of $90 million. However, it is important to note that most of the synergies were due to "organizational efficiencies" which relate to personnel and project management. While BP seems optimistic regarding production levels and the total returns expected from drilled wells, there is rising skepticism about the infallible Permian basin. It would take another quarter or two before BP provides actual production numbers versus the current potential estimates. In regards to BP delivering on shale, I am confident that BP would be able to leverage its extensive technological know-how as well as its superior project management teams to squeeze out as much oil from these wells as possible.
Since the payment for the purchase was made in all cash, BP's net debt had jumped to cause the all-important gearing ratio to reach 31%, exceeding the 20-30% guidance provided by management. Therefore, in order to de-lever the balance sheet, BP has undertaken an asset disposal program totaling $10 billion to be completed by the end 2020. Besides raising cash, BP's outlays have become more predictable since the majority of the outstanding oil spill claims have been settled and only the annual fixed payments remain. In addition to that, the steady growth in operating cash flow is providing BP with breathing space to comfortably execute the disposal plan and gradually bring the balance sheet into balance.
My only concern in this regard is the volatile energy markets and ongoing trade battles that may derail BP's financial plans for the year and 2020. It is crucial for BP to bring its debt level down soon in order to avoid making difficult decisions later.
An important facet of BP is its 19.75% stake in Rosneft (OTCPK:RNFTF). As a state-owned enterprise in Russia, Rosneft has a clear hegemony over the energy markets across the country. Instead of competing with Rosneft, this partnership allows BP to have a valuable stake in one of the largest oil and gas producers in the world. Moreover, the half yearly dividend BP receives goes a long way to shore up BP's cash flow with the $334 million received last month.
BP definitely devoted a significant amount of space on its earnings report to discuss the progress it has made to champion low carbon initiatives. I do agree that these opportunities which BP explores with different partners across many countries would help BP manage its future transition into renewable energy. However, I do not believe the transition will happen anytime soon for investors to concern themselves too much for the moment.
Finally, I have admired the current management team's ability to deliver on the projects and financial milestones it sets for the company. While its competitors are reeling from lower profits, BP demonstrated a solid quarter with a measured approach to risk. BP has also hinted at a possibility for a dividend hike prior to the year-end, conditional upon the de-risking efforts. All things considered, at a 6.5% dividend yield, I believe the current market volatility has provided investors with a desirable opportunity to invest in BP. Although there is a chance of the stock price falling lower, in the long run, BP would make an excellent investment to SWAN and collect a steady stream of dividend payments. Therefore, I am LONG BP.
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.