BP share price: what to expect from Q4 results

When is BP’s earnings date?

BP is scheduled to release its results on the morning of Tuesday 5 February. This will cover both its fourth quarter (Q4) and the full financial year (FY) to 31 December 2018.

BP results preview: What does the City expect?

BP will be keen to keep up the momentum with its annual results. Having recovered from the Deepwater Horizon oil spill in 2010 and come out the other side of the market downturn of 2015-2016 a fitter and leaner business, the oil giant has given investors plenty of reason to believe in it again. The dividend was raised for the first time in 15 quarters earlier this year, it announced its largest acquisition for 20 years in July, and has demonstrated the effect of its flexibility and continued cost discipline through its bottom line.

Read more on whether BP hit the ‘sweet spot’ with investors or not

The price of oil at the start of Q3 was $78.00 per barrel and, driven higher as trade tensions between the US and China escalated and fresh US sanctions on Iran started to bite, went on to peak at $86.50 per barrel at the very start of October to help boost BP’s quarterly earnings. However, oil prices suffered heavily in Q4 and bottomed-out at $50.62 on 25 December, which will have the reverse effect on BP’s earnings this time around. A company-compiled consensus of 20 brokers expects BP to report Q4 underlying replacement cost profit – its version of net income – of $2.63 billion, down almost 31% from the $3.8 billion reported in Q3. However, profit is still anticipated to be 25% higher compared to Q4 2017.

Learn about how FTSE and UK dividends may hit all-time high in 2019

Having generated a profit of $9.25 billion over the first nine months of 2018 [2.3 times higher year-on-year (YoY)], the consensus estimates annual underlying replacement cost profit for 2018 will be $11.87 billion, up 91% from the $6.2 billion reported in 2017 and 4.6 times higher than the $2.6 billion booked in 2016.

What to watch out for in BP’s FY2018 results

BHP Billiton's (BHP's) US shale assets

BP announced it would buy a string of producing assets across the Permian, Eagle Ford and Haynesville basins onshore the US from BHP in July for $10.5 billion, representing its biggest acquisition for 20 years. BP originally planned to use existing cash to pay for half and issue new shares to fund the other, which it would repurchase through share buybacks funded by $5-$6 billion worth of asset sales. However, following the improvement in oil prices in Q3, BP said it had decided to instead fund the entire deal in cash, meaning it didn’t need to issue new shares or launch a buyback as a counter.

The asset sales, however, will still go ahead but instead of funding share buybacks the proceeds will be used to pay-down debt. The deferred half of the consideration is being paid over six monthly instalments that started in November (implying final payment will be made by the end of April). This structure and timeline is unlikely to have changed even if oil prices slid dramatically in December, but keep an eye out for any tweaks. Otherwise, investors will be keen to see the immediate impact of the new assets: they collectively produce around 190,000 barrels per day (bpd).

That should take BP’s overall onshore US output up from 315,000 barrels of oil equivalent per day (boepd) to 505,000, and account for about 15% of BP’s total production of 3.6 million boepd, including its share from Rosneft (although, this is likely to change as some other US onshore assets are to be sold off). BP said it expected to save $350 million in cost synergies once the BHP assets had been integrated but could provide a surprise after admitting that figure was very conservative. Lastly, look for any advancement on plans to raise oil output from onshore the US. BP’s output in the area is predominantly gas with just 10,000 bpd oil being pumped out, but the BHP deal will allow BP to create a 200,000 bpd oil business by the mid-2020s.

Divestments

BP said it expects to have sold-off just over $3 billion worth of assets before the end of 2018 but, having only raked in $400 million over the first nine months of the year, has left it all for the final quarter. Current deals progressing involve a swap-deal that is seeing BP trade its stake in the Greater Kuparuk Area on the North Slope of Alaska for ConocoPhillips's stake in the Clair field in the UK North Sea, allowing BP to raise its stake in a core project while offloading another. Deals that will see BP offload its interests in the in the Magnus oilfield to EnQuest and the Rhum field to Serica Energy (both in the North Sea) are also yet to close.

Importantly, that $3 billion target is separate from the additional $5-$6 billion worth of divestments to be made to help pay-down debt. The exact assets to be sold have not been revealed as of yet, but BP’s chief financial officer Brian Gilvary previously said it would 'predominantly' involve selling-off some of BP’s existing assets onshore the US. BP has also said price will determine sales, suggesting it could look to retain them if prices aren’t attractive. Investors should monitor whether the asset disposal plan has changed or for further detail on what parts of the portfolio could be cut.

Gearing and net debt

Net debt at the end of Q3 stood at $39.2 billion while gearing sat at 27.5%, within BP’s guided 20%-30% range. Gearing is expected to stay within that band in Q4. However, BP has already warned that if it does pay for the BHP deal entirely in cash then gearing will 'temporarily' break beyond 30% in 'early 2019' due to the added cash outflow before moving 'back down towards the middle of the band' by the end of 2019 as cashflow improves and income from asset disposals is received. Its plans for debt are therefore dependent on the structure of the BHP deal and its plans to sell off assets.

Dividend and share buybacks

BP raised its quarterly dividend for the first time in four years in its last set of results, whetting the appetite of investors who will be hoping it is the start of sustained growth in payouts. The Q3 payout was 10.25 cents per share (up from 10c) and took the payout for the first nine months to 30.25c. Shareholders should expect the annual dividend to be a minimum of 40.50c.

Although BP doesn’t currently plan to launch a fresh buyback because of the BHP acquisition, it will continue to repurchase stock to offset dilution from its existing scrip dividend: the value of which over the first nine months of 2018 was over $1.05 billion.

New project start-ups and production

BP managed to capitalise on higher oil prices in Q3 by bringing new production online sooner than expected. It brought five major new projects online in 2018 with more in the pipeline. Both the Thunder Horse Northwest expansion project in the Gulf of Mexico and the Western Flank B project in Australia began production ahead of schedule in October, helping boost BP’s underlying production (which excludes contributions from Rosneft) by 10% in the first nine months of the year to 2.5 million boepd.

BP has said output would rise once the BHP deal had closed, suggesting its results should benefit from at least two months of output from its new assets during Q4. Investors will be keen to see progress from BP’s newest operations and encouragement that further developments, such as the £4.5 billion Clair Ridge oil project in the west of Shetland, are advancing.

Organic capital expenditure

BP is aiming to keep annual organic capex between $15-$17 billion through to 2021 but has said this should be at the bottom-end of its range for 2018. Although it is keen on fixing expenditure for the next few years, it does plan to rejig its budgets. For example, BP plans to raise investment onshore the US from $1 billion per year to $2-$3 billion following the BHP deal while staying within its existing framework, meaning it is either freeing up capital through cost-cutting or diverting investment from elsewhere. Investors should look out for spending priorities for 2019 and beyond.

Oil price commentary

BP said in October that its plans were based on future oil prices of $60-$65 per barrel, which is a statement that the company plans to remain stringent on costs and not start spending when prices are high. Chief executive Bob Dudley added further detail in late November when he said BP was targeting a breakeven toward $40 per barrel. Investors should feel reassured that BP plans to keep costs down. But, with oil prices so influential over BP’s earnings and share price, any signs that BP is more up or downbeat about prices is a key indicator.

Gulf of Mexico oil spill payments

The financial and reputational effects of the Deepwater Horizon oil spill still plagues BP today, but the company has come through the worst of it. It has paid a staggering $66.8 billion since the incident in 2010 and total payments this year are expected to amount to just over $3 billion. Further sums will be paid, but they are declining and almost becoming an irrelevant feature of BP’s results. Still, slowly shrugging off this burden will help improve cashflow: an amount of $3 billion is nothing to be sniffed at.

How to trade BP’s FY2018 results

The BP share price is currently trading at the same level it was in mid-April 2018, even though it has since delivered a huge improvement in earnings, a landmark acquisition, and reinstalled growth to its quarterly dividend for the first time in four years.

The price of oil – which the shares of BP and other oil majors track almost daily – has been one of the main reasons for this. Brent climbed to its highest level in almost four years in early October 2018, breaking past $86 per barrel, and BP shares followed suit to hit 603.2 pence – their highest level since before 2010, when BP shares were punished for Deepwater Horizon and the global ‘oil glut’. They have since fallen 17% from that peak.

The BP share price started to climb two trading days ahead of its Q3 results being released, rising just shy of 11% over four days (the third being the day of release on October 30). However, most of those gains were erased within just two days as oil prices began to plunge.

BP share price: technical analysis

After forming a large double top pattern (large 'M' shape price action above the 525 level), the BP share price has corrected to fall firmly below the 200-day simple moving average (SMA) - blue line labelled 200MA. The 200MA is often used as a gauge of a longer-term trend bias for traders. The price trading firmly below this level at present assumes that trend bias to be down.

Wait for a rebound before short entry into the BP share price

In the short term, the price is rebounding out of oversold territory. The rebound out of oversold territory is against the longer-term downtrend (as considered by the 200MA).

Trend followers might wait for the rebound to complete before finding short entry in BP targeting a move towards support at 485, a break of which would consider 460 as the next downside target. Should the current rebound instead move above resistance at 525, the short trade opportunity would no longer be considered valid. Only if the rebound pushes the price of BP back above the 200MA would an uptrend be considered and a long bias to trades may once again become a viable option.

BP shares: broker recommendations

A Thomson Reuters poll of 24 analysts shows there is a long-term average Buy rating (as of 29 January 2019) on BP shares. While there is a small, albeit notable, number of analysts recommending Hold the overall sentiment behind BP shares has become more bullish with several brokers having upgraded the stock in the last three months.

BP earnings: oil price drop to cause a slip but far from a fall

The severe drop in oil prices in the last quarter of the year will take some steam out of BP’s Q4 results but that should not detract from what has been a fantastic year for the oil giant.

Investors have been pressuring the entire sector to cut-back on spending and speed up new projects in order to accelerate returns through dividends and buybacks, and BP has been delivering on all three fronts. It has made it clear it intends to retain its cost discipline so it can reap the rewards when prices are high but stay resilient when they are low. It brought five major new projects online in 2018, some ahead of schedule, following the seven it launched the year before. And the dividend is growing once again with future share buybacks a firm possibility.

Sentiment toward BP shares is bullish, with the majority of brokers believing the stock is undervalued.