BP quarterly profits gush higher

BP enjoyed its best quarterly result in more than five years as profits gushed higher than expected thanks to strong oil prices.

Amid the supportive price environment, the oil colossus said it would now be able to use its own cash to pay for the $10.5bn acquisition of onshore oil and gas assets from BHP Billiton on Wednesday, rather than issue shares as it had suggested for the deferred half of the deal.

As a result, the promised divestments of $5-6bn will be used to pay down debt and the share buyback programme will also be continued to offset dilution from the scrip dividend. Net debt at 30 September was $39.2bn, compared with $39.8bn a year ago.

Some $6.6bn of cash flowed in the third quarter as BP generated an underlying replacement cost profit of $3.8bn, which was up $1bn on the preceding quarter, more than double the third quarter last year and well ahead of the $2.85bn that analysts had forecast.

All divisions performed better than expected, with significant earnings growth from the upstream oil production division and the stake in Russia's Rosneft.

"Our focus on safe and reliable operations and delivering our strategy is driving strong earnings and growing cash flow," said chief executive Bob Dudley. "Operations are running well across BP and we're bringing new, higher-margin barrels into production faster through efficient project execution."

On the BHP deal he said it will "transform" the company's position in the US and "create significant value".

Guidance for the full year was confirmed of capex of around $15bn, divestments of at least $3bn, with production expected to be higher in the fourth quarter than the third due to the BHP acquisition, and the downstream is expected to have higher turnaround activity.

Charges for the Gulf of Mexico oil spill of $560m for the quarter were higher than expected, though full year guidance was unchanged at just over $3bn.

BP shares had jumped 4% to 557p after an hour and half of trading on Tuesday morning.

Analysts at RBC Capital Markets observed that net income was well above consensus forecasts as all divisions had better-than-expected performance, with the upstream and the downstream contributing roughly equally, and higher North American heavy crude oil discounts within Refining & Marketing. Underlying cash flow was higher than expected, though not as strong a beat compared to earnings.

"2017 was a transition year for BP, with a number of major projects in final execution stages and still a significant Macondo burden," RBC said. "We look to 2018 for continued earnings momentum both in the upstream and downstream, and more importantly we expect cash conversion to improve this year."

Analyst Nicholas Hyett at Hargeaves Lansdown said the results beat expectations largely thanks to improved oil prices, although guidance for the full year remains basically unchanged.

"The profit jump is eye catching, but the cash flows are more important. Net debt has fallen again this quarter and, assuming all is well in global oil markets, BP now feels able to fund the BHP deal out of existing cash rather than issuing new shares. That’s very good news for investors and a serious vote of confidence by management. Falling costs associated with the Gulf of Mexico oil spill are helping here, although eight years on the disaster still cost BP $500m in Q3."

"Growth in renewable energy and the introduction of electric cars may be long term worries for investors. But as profits gush and cash flows, the here and now looks pretty rosy for BP.”