The saga for BP plc (ADR) (NYSE:BP) has pretty much been covered ad nauseam at this point, and for good reason. The Deepwater Horizon disaster pretty much decimated shares and the firm’s ability to function like it did before, which obviously was reflected in the BP stock price.
The legal bill from the worst oil spill in history has been staggering and the problems from it have weighed on shares for roughly seven years. But BP stock seems to finally be turning a corner. And turning very fast at that.
The integrated energy firm has managed to do something that its big oil rivals have yet to accomplish- and that’s resume share buybacks. For BP and its investors, it’s the clearest sign yet, that the firm is back in a big way.
BP Announces a Big Buyback Program
While every quarter is important, last quarter for BP stock was especially significant. In it, BP managed to see rising production from its upstream energy operations.
In the jump to oil and natural gas production, BP managed to report pre-tax earnings of $1.56 billion from the unit vs. a loss of $224 million last year during this quarter. Higher margins and lower costs of production didn’t hurt either.
But here is where it gets juicy for BP stock.
A Comeback for BP Stock
That rising production and everything that comes with it, has reversed BP’s cash flow issues. Cash generation at the energy major hit its highest levels since the oil price slump began back in 2014.
All in all, BP managed to report cash flows from operations during the third quarter of more than $6.2 billion. That builds on the back of the $4.89 billion in cash flow it produced in the second quarter of this year.
The kicker is that all of this cash flow generation at BP is now more than enough to fully cover its dividend as well as fund its current capital expenditure programs.
Being cash flow positive is still a tough nut to crack for a lot of energy firms. Some like Chesapeake Energy (NYSE:CHK) continue to get close, but haven’t reached that goal yet. And depending on the whims of oil prices, many won’t be able to do just that. But not BP.
Nonetheless, what it really does for BP is allow it use its balance sheet and extra cash for other share enhancing activities.
That includes a hefty number of buybacks, which is something that its other integrated energy rivals like Total (NYSE:TOT) or Exxon (NYSE:XOM) have yet to start doing since the oil price slump.
According to BP’s announcement, the firm will repurchase roughly 1.96 billion shares between Nov. 15 and the company’s annual general meeting in 2018.
What’s truly significant is that the buyback program also signals the end of the BP’s so-called script dividend scheme enacted during the oil slump.
To keep its dividend going, BP along some other European energy stocks including Royal Dutch Shell (NYSE:RDS.A) began allowing investors to receive shares instead of cash during dividend payouts. This way BP could conserve cash, while still keeping the dividend intact.
Analysts estimate that about $1.6 billion worth of shares were issued through the script program each year.
More For BP Stock
BP’s buyback program is truly the sign investors have been looking for. It’s the turning point in nearly a decade’s worth of stalled growth and opportunities. The firm is finally generating enough cash to actually reward investors rather than dilute them with more share issues. That’s huge.
Moreover, it also signals that the good times may be here to stay.
Since the oil slump and its Deepwater Horizon mess, BP has continued to drive down costs, sell off non-core assets and streamline its operations. That’s only helped this whole process of cash flow generation along. With oil prices still climbing, analyst estimate that BP’s cash flows should continue to climb as well.
With the big buyback program and ending of its script dividend, management certainly thinks so as well. It ultimately shows confidence in BP shares and the company’s ability to keep it up.
Buying BP Stock
For investors in BP, the road has been a bumpy one. However, BP finally has moved on to greener pastures. Cash flows are finally to the point where it can reward long suffering shareholders.
And that makes it finally a big time buy for energy investors. With a 6% yield, BP shares are still in bargain territory. But they won’t last that way for long.
BP has truly turned the corner.
Disclosure: None
