UK-based oil giant BP (LON:BP) (NYSE:BP) reported a first-quarter profit that beat consensus estimates, driven by strong oil and gas trading activity. However, the company’s shares fell 6% on Tuesday as BP slowed its share repurchase program while cash flow momentum is also likely to weaken.
BP reported an underlying replacement cost profit of $4.96 billion for the first quarter of 2023, up from $4.8 billion in the previous quarter, and above the consensus projection of $4.3 billion, according to Refintiv. On the other hand, profit remains notably down from a whopping $6.2 billion that was reported in Q1 2022, when fossil fuel prices skyrocketed amid Russia’s invasion of Ukraine.
Slowing Buybacks as Profits Moderate
The oil major said its Q1 earnings reflected strong oil and gas trading activity in the recent period. Still, operating cash flow came in at $7.62 billion for Q1, missing the $8.31 billion consensus. BP said its net debt in the first quarter fell to $21.2 billion, from $27.5 billion in the same period last year.
Meanwhile, the company expanded its share repurchase plan by an additional $1.75 billion, which is expected to be concluded before it reports Q2 2023 financial results in August. BP also said it completed its prior $2.75 billion stock buyback program on April 28.
“This has been a quarter of strong performance and strategic delivery as we continue to focus on safe and reliable operations,” BP CEO Bernard Looney said.
"And importantly we continue to deliver for shareholders, through disciplined investment, lowering net debt and growing distributions,” he added.
The London-based oil and gas company said it expects to deliver share repurchases of roughly $4 billion per year, which stands at the lower end of its capital expenditure range of $14 billion to $18 billion.
BP said its capacity for a yearly increase in the dividend per common share is at around 4%. The company reiterated its dividend from the earlier quarter of 6.61 cents per ordinary share, after a 10% hike in February.
Analysts at investment banking firm Jefferies said the slowed share repurchase plan “will more than offset the good operational performance as BP is the first international oil company...to cut buybacks this quarter.”
The oil giant bought back $11.7 billion worth of its stock in 2022. The further $1.75 billion indicated on Tuesday means that BP will surpass its goal of using 60% of surplus cash for share buybacks.
The company said it expects oil and gas prices in Europe to remain elevated in Q2, even though refining profit margins are poised to drop amid declining diesel prices. Brent crude oil registered an average price of $81 per barrel in the first quarter of 2023, down 16% year-over-year and 7% from the previous quarter.
This marks a significant decline from 2022 when mounting energy prices and market volatility fueled BP’s profit to a new record high of $28 billion.
Still, BP’s shares continue to outperform its competitors in 2023, up 10% year-to-date. Shares of Exxon and Shell (LON:RDSa) gained 6% and 3% during the same period, respectively.
Continued M&A Activity in Oil Sector
During the weekend, BP reached an agreement to buy a 27% stake from Shell in the Browse LNG joint venture. With the move, BP expands its holdings in the biggest untapped gas project in Australia, which was launched as a joint effort between Woodside (OTC:WOPEY) Petroleum, Shell, BP, Japan Australia LNG, and BHP Billiton (NYSE:BBL).
The project, which has an estimated cost of $20.5 billion, has been stalled for several years but it is still considered a suitable replacement for outdated gas fields to supply the North West Shelf LNG plant. The move would extend the plant’s lifespan by decades, and provide LNG with the necessary capacity to meet demand from Australia’s most important trading partners including Japan, China, and South Korea.
Elsewhere, French energy and petroleum company TotalEnergies said last week it has agreed to sell its Canada-based oil sands operations to Suncor Energy (NYSE:SU) in a $4.1 billion deal, with potential further payments of up to $450 million.
TotalEnergies initially intended to spin off its Canadian business but the Suncor deal turned out to be a more straightforward move for the French oil major. The company plans to distribute at least 40% of the cash flow generated in 2023 to its shareholders, through share repurchases of special dividends.
Continued M&A activity in the oil sector comes after TotalEnergies (EPA:TTEF) and four other Big Oil companies bagged combined profits of nearly $200 billion last year, fueled by soaring energy prices last year due to the war in Ukraine. Shell (NYSE:SHEL), Chevron (NYSE:CVX), and Exxon Mobil (NYSE:XOM) recorded more than $132 billion in combined profits in 2022.
The French oil company posted a full-year profit of $36.2 billion in 2022, doubling its 2021 profits. The remaining Big Oil giants including Exxon, Chevron, BP, and Shell, also reported immense profit growth last year, with Exxon’s $56 billion marking an all-time high for the Western oil industry.
The record-breaking profits have allowed global energy giants to distribute higher dividends to shareholders and announce further share repurchases. But on the other hand, it also led to calls for governments to impose higher windfall taxes on oil profits.
“You may have noticed that Big Oil just reported record profits,” U.S. President Joe Biden said in his State of the Union address back in February.
“Last year, they made $200 billion in the midst of a global energy crisis. It’s outrageous.”
Summary
BP shares are trading lower after the latest quarterly earnings report showed moderating profits as crude oil prices continue to trade in a $70-80 range. Despite solid results, investors are evidently pessimistic about the slowing pace of buybacks as well as lower-than-expected operating cash flow numbers for Q1.
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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.