Earnings Well Above Expectations
British Petroleum is finally starting to shine. Adjusted earnings were down by “just” 28% year over year at $3.7 billion. This means that the company could generate earnings per ADR of $1.17, which was well above market consensus, at just $0.96 per ADR. The reasons can be found in a lower tax rate and good upstream results explained by higher prices.
Even when production was down by 2%, realization prices were up by 4% at $67.4 per barrel of oil equivalent (boe). Downstream was, by far, the weakest link of all. Downstream earnings declined aggressively by 76% year over year due to lower margins and the sale of two refineries in the U.S. As a matter of fact, earnings were 74% upstream, 14% Rosneft and 12% downstream. Earnings were good but they are still a reflection of a company that is trying to reshape itself.
The Future Ahead
British Petroleum has once again reassured investors that its committed to invest in order to re-build itself. The company issued a 2014 capex guidance of $24 billion to $25 billion and will complete 15 to 20 deep water exploration wells this year alone. Besides, in order to strengthen its downstream portfolio, British Petroleum plans to start up its Whiting refinery very soon, which is not a detail since the refinery is expected to generate annual cash flows of well over $1 billion.
All the facts stated above were expected by the market but what the market was not expecting was British Petroleum's plan to further sell more than $10 billion of its assets through 2015. More importantly, the sale proceeds will be used to boost the company's share buyback plan – during this quarter, the company used $1.3 billion out of its $7 billion operating cash flow to fund buybacks. On top of this, British raised its quarterly dividend by 6%.
I strongly believe that for the foreseeable future British Petroleum will continue on this track of increasing dividends and buybacks as cash flows grow thanks to higher and more profitable production rates.
British Petroleum's stock still remains undervalued. I think the sell-off that occurred after the platform explosion on April 2010 is still weighing on the shares. As a matter of fact, the company trades at just 8.1 times 2014 earnings and 1.1 times its book value. Meanwhile, other oil majors such as ExxonMobil (XOM) and Chevron (CVX) sell for considerably higher valuation levels. ExxonMobil trades at 11 times 2014 earnings and 2.3 times its book value while Chevron trades at 11.7 2014 earnings and 1.6 times its book value.
I will stay long British Petroleum's shares. In the meantime, I can enjoy the company's 5% cash dividend yield – ExxonMobil and Chevron pay 2.84% and 3.33%, respectively.