Will BP shares quickly recover from the 2% drop caused by Q3 results?

The BP (LON: BP) share price was at 589p only three years ago. On 17 January 2020, it had fallen to 496p, before crashing to 251p by 20 March 2020 in the pandemic-induced mini-crash. As much of the globe went into lockdown, demand for oil and gas dived, sending the BP share price to 196p by 30 October 2020. But as the global economy recovers, the demand for oil and gas has soared, sending it to 363p on 15 October, before dipping to 346p today.

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BP share price: Q3 results

BP reported an underlying replacement cost profit of $3.3 billion, an increase of $500 million compared to the $2.8 billion reported in Q2 2021. Encouragingly, it beat Refinitiv expectations of $3.1 billion. And it’s a 3,200% increase on the $100 million Q3 2020 figure, when oil prices collapsed due to the pandemic.

But at around $85 per barrel, the price of Brent crude is now at a seven-year high. And the Bank of America is predicting it will rise to $120 a barrel by the end of June 2022. Moreover, BP says that demand is already back to over 100 million barrels a day. And Tamas Varga, an analyst at PVM Oil Associates, said that ‘global oil demand is healthy and supply is trying to catch up…OPEC+ members (will) only increase output by the pre-agreed 400,000 barrels per day, virtually guaranteeing further stock depletion.’

CEO Bernard Looney commented that ‘rising commodity prices certainly helped’ in Q3, saying that ‘we’re a cash machine at these types of prices.’ However, he also highlighted ‘delivering significant cash to strengthen our finances, grow distributions to shareholders and invest in our strategic transformation’ as key to the quarter’s success.

Meanwhile, net debt fell for the sixth quarter in a row from $32.7 billion to just under $32 billion. And looking forward, BP will be increasing its dividend by 4% by 2025. It’s also announced a $1.25 billion share buyback in addition to the $900 million already bought back in the previous quarter. And it plans to maintain buybacks at a rate of around $1 billion per quarter as long as oil prices remain above $60 per barrel.

However, due to ‘significant adverse accounting effects’ caused by the ‘exceptional’ rise in forward gas prices, BP posted an overall quarter loss of $2.5 billion. Accounting regulations mean that it must book changes in the market value of the contracts it uses to hedge its liquefied natural gas (LNG) shipments. As gas prices soared over the quarter, the increased expense of hedging cost the company $6.1 billion. But the company said the problem is ‘is expected to unwind if prices decline and as the cargoes are delivered.’ On the other hand, it warned that gas markets ‘will remain tight during the period of peak winter demand.’

Transition to renewables

BP is planning to reduce its oil and gas output by 40% and increase its renewable power capacity 20-fold by 2030. It also plans to increase spending on low carbon energy to $5 billion per year. Looney said BP was ‘investing with discipline’ in renewables that were ‘laying the foundations for a material business…this is what we mean by performing while transforming.’ But he expects that it will take until at least 2025 before BP's green energy projects become profitable. And investor concerns over this shift is in sharp focus with the COP26 summit ongoing in Glasgow right now.

The future for the BP share price in the near-term is pandemic dependent. Its Q3 results highlight that ‘it is difficult to predict when all current supply and demand imbalances will be resolved and what the ultimate impact of COVID-19 will be.’ But in the longer-term, it depends on the success of its green energy transition.