For oil major BP plc (ADR) (NYSE:BP), it seems like every quarter is a make-or-break moment.
Ever since the Deepwater Horizon spill, BP has been in a perpetual funk. A funk that has only gotten worse as oil prices have cratered and the spill’s legal/clean-up fees still haunt it. But BP may finally be putting the spill and its slump behind it.
Its latest earnings report is a sign that the energy stock’s woes may finally be behind it and its recent moves are really starting to bear fruit. So much fruit, that BP has the ability to finally start rewarding shareholders.
For would-be investors, this could be the signs you have been waiting for.
Looking at any of BP’s earnings reports over the past few years, the picture has been pretty much the same. Dwindling production, lower overall profits and a stagnating share price.
BP has had to navigate the same low oil price environment as its other major rivals. But firms like Exxon Mobil Corporation (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.A) didn’t have the luxury of one of the worst oil spills hanging around their necks.
That albatross made the low price environment potentially worse for BP.
To get rid of it, BP cut costs, went back into the deepwater and sold off non-core and under-performing assets. This allowed to reduce its break-even point for production. During the first nine months of the year, $49 per barrel was enough for BP to cover its dividend and pay for organic capital spending. With oil prices cooperating and steadily rising this year, BP was able to use this new lower break-even to its advantage.
According to its latest earnings release, BP’s underlying replacement cost profit — which is an energy proxy for net profits- rose to $1.865 billion in the third quarter. That managed to crush analyst estimates. Even better is that revenues increases as well. BP reported sales of $60.808 million. Again, beating estimates by a wide margin.
Its efforts in new deepwater regions and focus on onshore drilling has also stated to pay-off. Oil and gas production rose 14% during the quarter versus a year ago to 3.6 million barrels per day. This rising production helped reverse a loss from its upstream operations. BP had pre-tax earnings of $1.56 billion from the unit vs. a loss of $224 million last year during this quarter.
Other big wins in BP’s quarterly report included rising cash generation, which hit its highest levels since the oil price slump began and net debt dropped for the first time in two years.
But what was really exciting was that BP announced a major buyback program. The firm will start spending as much as $400 million a quarter to buy back shares- especially issued under its script dividend program.
To keep its dividend going, BP along some other energy stocks like Statoil (NYSE:STO) — began allowing investors to receive shares instead of cash during dividend payouts.
That way it 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
BP Stock Is Bouncing Back
The higher profits are nice, but the buyback and ending of its script dividend program is the real sign that BP has officially bounced back from the depths of the oil slump. Cash flow generation is finally such that firm is confidently and consistently making enough to really consider buying stock in it.
And that cash should continue to march higher.
Oil is finally moving higher and staying at elevated levels. Tightening supplies courtesy of OPEC and geopolitical tensions have managed to keep oil above $50 per barrel for weeks now. And lately, international benchmark Brent crude has marched higher than $60 per barrel. A mark not seen since early 2015 and is more than double the 12 year lows reached at the beginning of 2016.
Those higher oil prices are only going to supercharge BP’s profit potential further. And that’s something we haven’t been able to say about the energy firm since really 2010 when the spill first happened. And that is most definitely something we could not have ever said during the beginnings of the oil slump.
Put BP Stock on Your List
To quote CEO Bob Dudley, “we now have a base business that can balance itself at $49 a barrel.”
And that’s exactly what BP has done. All of its moves have paid off and the proof is in its latest earnings report. The buyback program is a major sign that BP has finally gotten its mojo back.
For investors, that really means is that BP is no longer damaged goods masquerading as a value stock. It is a value stock. And in that, BP can be bought.
The oil major is once an again back on track to be one of the superstars in the sector. Another quarter like this one and people will take notice.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.