PA (BP) reported record fourth-quarter earnings but still missed consensus views in a mixed report early Tuesday. The company provided some details of a downside in its aggressive move into renewable energy as it returns its primary focus to oil and gas production. BP shares rose on Tuesday.
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BP earnings
Dear: Analysts predicted fourth-quarter earnings to grow 35% to $1.66 per share, according to FactSet. Wall Street expects revenue to rise 6% to $55.39 billion. Free cash flow was expected to decline 3% to $4 billion, while analysts saw capital spending rise 32% to $4.78 billion in the fourth quarter.
By 2022, Wall Street forecasts that earnings per share will skyrocket 131% to $8.84 and revenue will rise 40% to $230.1 billion.
Profits: Earnings reached $1.59 per share, up 29%. Revenue beat expectations, rising nearly 33% to $69.3 billion. Free cash flow soared 29% to $5.33 billion.
Replacement cost profit, which BP uses as its indicator of profitability, was $4.8 billion for the quarter. That’s more than $4 billion a year ago, but just below the $5 billion projected by analysts. It’s also well below the $8.2 billion reported in the third quarter.
Replacement cost is how much it costs the company to return oil and natural gas produced during a period to proven reserves.
For the year, BP posted a profit of $27.6 billion, or $8.74 per share. That surpassed its previous record of $26 billion from 2008. The 2022 results included a writedown of $25 billion in lost Russian assets.
BP Cuts Production Reduction
The UK-based energy giant anticipates oil and gas production to be around 2.3 million barrels of oil equivalent per day by 2025. By 2030, BP expects to produce 2 million barrels of oil equivalent per day. That would be about 25% below BP’s production in 2019, below the company’s previous target of a 40% reduction.
These numbers exclude BP’s production drop from halting oil and gas operations in Russia. BP reported that the phase out of Russian production in 2022 resulted in a 40% drop compared to 2019.
Before the fourth-quarter report, plans called for BP to cut oil and gas production by 40% by 2030, compared with 2019 levels. BP Chief Executive Bernard Looney has also said the goal is increase alternative energy investments to around 50% of total capex by 2030.
The company said on Tuesday that it plans to increase spending by up to $1 billion per year on both oil and gas production and renewable energy, including hydrogen, bioenergy and electric vehicle charging networks.
“We need continued near-term investment in the current energy system, which is dependent on oil and gas, to meet current demands and ensure that the transition is orderly,” Looney said in a statement Tuesday.
Company executives on the earnings call also told investors that the company will continue to invest aggressively in “transitional growth engines.”
BP shares
BP shares rose 5.6% to 36.78 on Tuesday during market trading. As of Tuesday, the shares had fallen about 1% since the start of 2023. BP shares have formed a flat bottom and are rising towards an official buy point of 36.21, according to MarketSmith.
BP shares have lagged behind Exxon Mobil and Chevron in recent years. Since the end of 2019, BP shares have fallen around 9%. However, shares have rallied around 57% from October 2020 lows of 14.74. Exxon Mobil shares have risen 258% since October 2020.
BP shares rank third in IBD’s integrated oil and gas industry group. The shares have a composite rating of 90 out of 99. The stock has a relative strength rating of 75, an exclusive IBD Stock Checkup indicator for share price movement. The EPS rating is 79.
Reduction of renewable energy
Europe’s big names in energy, including BP, have been under pressure for years to move quickly into renewables. However, as BP shares and other European-based supermajors lag behind US-based giants. exxonmobil (XOM) and Chevron (CVX), the leadership has begun to backtrack, declaring that alternative energy is less beneficial to shareholders than fossil fuels.
On February 1, The Wall Street Journal reported that Looney plans to scale back elements of the oil giant’s drive toward renewable energy.
Disappointed with the returns on the company’s renewable energy investments, Looney plans to pursue a scaled-down alternative energy strategy, according to the Wall Street Journal. BP’s CEO, to maximize profits, is also looking to cut future investment in solar and offshore wind, shifting focus mainly to oil and gas operations.
This is an abrupt change in messaging from the company which, two decades ago, tried to rebrand itself from “British Petroleum” to “beyond petrol”.
BP’s earnings on Tuesday add to reports from Exxon Mobil, Chevron and Shell (SHEL), which combined generated more than $132 billion in profits during 2022. The three energy giants also returned $78 billion to shareholders through buybacks and dividends throughout the year.
BP Stocks: Merger Speculation
On January 25, Citigroup (C) analyst Alastair Syme provided a heads up on potential industry consolidation. Exxon Mobil and Chevron could consider buying the big European companies BP, Shell or Total Energies (TTE), he wrote.
Syme wrote that shares of BP, Shell and TotalEnergies have all dropped due to ESG investment and moves away from oil and gas.
Halliburton, Baker Hughes and SLB shares plan to return 50% (or more) to shareholders
“Markets are unlikely to close the gap on their own: the cost of European oil shares remains locked in investor and political headwinds,” Syme wrote. “What is really needed is for the industry to arbitrate this value for itself.”
The analyst added that if an acquisition occurs, the “prize” for Exxon Mobil or Chevron could be considerable.
“We look at the strategic imperative, financial buildup, and political headwinds of any two US IOCs (Exxon or Chevron) potentially looking to try to acquire one of their main European competitors (BP, Shell, or TotalEnergies)” Syme wrote.
BP Stocks: The Oil Market
Crude prices rallied for the second straight day on Tuesday amid optimism about China’s reopening recovery.
US crude oil futures advanced 2% to $75.60 a barrel. Brent crude prices rose 1.4% to $82.14 a barrel. On Sunday, the European Union price ceilings and a ban on maritime imports of Russian oil products came into force.
By the end of January, US crude had risen back to $80 a barrel. Prices regained support above the 50-day moving average line for the first time since mid-November. However, last week US crude oil inventory data pushed prices below $76 per barrel.
The main question investors and analysts are contemplating is how much China’s oil demand will rise with the Lunar New Year over and the wave of Covid seemingly fading.
Over the weekend, International Energy Agency (IEA) executive director Fatih Birol said China’s economy may be poised for a stronger-than-anticipated rebound that will boost demand for crude, Bloomberg reported.
The IEA has already produced an upbeat oil demand forecast that estimates China will drive global oil demand in 2023 to record levels. IEA estimates forecast that China’s reopening will boost global oil demand to 101.7 million barrels per day (bpd) in 2023, up 1.9 million bpd from 2022.
Follow Kit Norton on Twitter @KitNorton for more coverage.
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