BP share price: risks to consider after Q2 results

A week ago, FTSE 100 oil major BP posted its highest quarterly profit in 14 years. Q2 underlying replacement cost profits were $8.45 billion, well above the Refinitiv average analyst expectation of $6.73 billion, and up more than 200% compared to Q2 2021’s $2.8 billion.

Boosting its share price run since a low of 364p in mid-July, BP shares are now worth 422p, up 38% over the past year.

However, the FTSE 100 company’s stock is still some way below its 497p January 2020 pre-pandemic peak. And while a recovery to this price point is possible, BP faces several headwinds in Q3 and beyond.

BP share price: Q2 results

Key to BP’s stellar performance was its oil production and operations division, where adjusted profit before tax rose by 28% quarter-over-quarter to $5.9 billion. Conversely, its gas and low-carbon energy division saw profits fall by $500 million to $3.1 billion.

Brent Crude averaged around $42/barrel in 2020 and $70/barrel in 2021. But it shot up in 2022 to $140/barrel after Russia invaded Ukraine, before falling to just under $100 today.

Like the UK’s other oil major, Shell, BP is rewarding shareholders in a variety of ways. The company has increased its dividend by 10% to 6 cents a share and is also planning to buy back $3.5 billion of shares in Q3.

For context, CEO Bernard Looney has previously promised a minimum of $1 billion in buybacks for every quarter that oil prices remain above $60 a barrel, and also to increase the dividend by 4% a year through 2025.

Where next for BP shares?

With profits surging, BP shares appear a deceptively attractive buy. However, the FTSE 100 operator still carries significant risks.

First is BP’s sizeable debt pile. While it’s now fallen to $22.8 billion, down from $27.5 billion in Q1, and less than half the $50 billion on its books just a couple of years ago, BP’s debt remains fairly high in gearing terms relative to peers. And interest rates are rising.

Second, BP was forced to write off $29 billion after exiting its 19.75% stake in Rosneft. But arguably, the long-term scarring could cost it far more, having also lost expertise, synergy savings, and future revenue. In 2021, the stake generated $2.4 billion of profits for BP, as well as $640 million in dividends.

Most importantly, a third of BP’s oil production, representing a million barrels a day, came from Russia last year. When oil prices come back down to reasonable levels, it could leave BP with a weakened underlying business.

Third is the increasing risk of higher additional taxes being imposed on its profits. When the initial windfall tax was imposed by then-Chancellor Rishi Sunak in May, OFGEM had predicted the average annual energy bill would reach £2,800 in October. However, Cornwall Insight research suggests it will now reach £3,582, and exceed £4,200 in 2023.

With both PM contenders under significant pressure to spell out a larger support package for households, the temptation to increase windfall taxes on oil producers could become harder to ignore.

Moreover, it could be difficult for Looney to argue against them. Having set aside $800 million for the current windfall tax in Q3, he has already admitted it won’t affect BP’s investment plans in the North Sea, a key prior concern. Indeed, the tax includes a 91% relief for additional investments in the North Sea.

Further, while BP has pledged to invest £18 billion (circa $22 billion) in UK capital expenditure by 2030, this sum is not particularly large in the context of its profits. Even so, BP has argued that its ability to power the green energy revolution by investing 40% of capital expenditure into renewables by 2025 could be set back by additional taxes.

But this argument is unlikely to hold water. It’s spent $5.8 billion in capex so far this year, of which $2.8 billion was spent in Q2. And of this $2.8 billion, just $142 million has been invested in low-carbon energy investing, bringing the full-year total to $361 million.

Finally, there is now a real risk of demand destruction. With inflation rocketing and interest rates rising, high energy prices could precipitate a global recession, followed by an oil price collapse.

And with Vitol last month noting that demand is already starting to wane, a 1980s style oil glut following 2022’s 1970s-style energy crisis may be closer than many expect.

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*Based on revenue excluding FX (published financial statements, October 2021).