BP beats expectations with $3.3bn profit amid soaring energy prices

Uplift allowed the oil company to extend share buyback programme by $1.25bn

BP's logo. The boost in the oil company's profits has allowed it to increase dividend payouts and buy back shares. Reuters

Oil major BP reported a better-than-expected rise in third-quarter profit on Tuesday amid soaring oil prices and a strong trading performance as the global economy recovers from the Covid-19 pandemic.

Underlying replacement cost profits jumped to $3.3 billion in the three months to September 30, well ahead of an estimate of $3.01bn and up from $86 million a year earlier when oil prices had slumped due to the crisis.

The company's third-quarter profits also mark a steep rise on the previous three months, when it reported a profit of $2.8bn.

The third-quarter increase allowed the UK-based company, one of the world’s largest energy businesses, to expand its share buyback programme by $1.25bn, which will be completed before its full-year results.

“This has been another good quarter for BP – our businesses are generating strong underlying earnings and cash flow while maintaining their focus on safe and reliable operations,” BP chief executive Bernard Looney said.

"Rising commodity prices certainly helped but I am most pleased that, quarter by quarter, we are doing what we said we would – delivering significant cash to strengthen our finances, grow distributions to shareholders and invest in our strategic transformation."

However, on a reported basis, BP fell to a $2.9bn quarterly loss after it suffered a $6.1bn hit from the accounting treatment of rising forward gas prices.

The oil company's replacement cost loss compares with losses of $644m a year earlier, with the group blaming an accounting "mismatch".

Crude and gas prices have increased steeply amid surging demand after the global economy made a recovery from the early days of the pandemic when demand fell as airlines were grounded and motorists stayed at home rather than travel to the office.

Since then, Opec has increased production slowly after the deep cuts made last year when the crisis first struck.

Bernard Looney, chief executive of BP, has set the ambitious target of eliminating all of the company's emissions by 2050. Bloomberg

Surging gas and oil prices helped BP smash analysts expectations, said Mark Crouch, an analyst at multi-asset investment platform eToro.

“BP has decided to hand the gains made by higher commodity prices back to investors in the form of a $1.25bn share buyback – and expects to buy back another $1.25bn of stock in the fourth quarter, he said.

The energy company has already completed share buybacks worth $1.4bn announced when it released its second-quarter results.

“Market conditions are so favourable currently that BP says that if the price of oil were $60 a barrel – it is currently nearly $85 – then it could comfortably buy back $1bn a quarter and grow its dividend by 4 per cent a year through to 2025. That’s at the same time as bolstering its balance sheet and reducing debt," Mr Crouch said.

BP and its FTSE100 Index rival Royal Dutch Shell have both reported a boost to profits, in turn allowing them to woo investors by increasing dividends and buying back shares.

BP's third-quarter results come at a critical time for big oil companies as they have been delivered against the backdrop of the Cop26 summit.

Mr Looney said the “world is not going to solve climate unless it embraces greening companies” such as BP, which already has a strategy in place for the transition.

That approach is better than just divestment, he said.

Last year, the company wrote off $17.5bn from the value of its oil and gas business as it lowered its oil price expectations through to 2050.

The company has embarked on a major overhaul of its operations since the start of the Covid-19 pandemic, with a pledge to reduce emissions from the oil and gas it produces to net zero by 2050, amid pressure on the energy industry to cut greenhouse gas emissions.

In July, Mr Looney called for energy producers and consumers, as well as companies, governments, and society, to work together “to bring about the necessary change”.

“Companies like BP with net zero ambitions, coherent plans and near, medium and long-term aims – companies which are committed to ‘greening’ – have a hugely significant part to play in achieving the Paris goals," he said at the time.

BP used some of its extra cash into paying down its liabilities, which rose in early 2020 as prices collapsed due to the global pandemic. At the end of the third quarter, the company’s net debt was $31.97bn, down from $32.71bn at the end of the second quarter.

However, unlike its oil rivals, BP is sticking to its capital expenditure budget of $13bn for next year and plans to stay “very focused on capital discipline”, Mr Looney said.

He expects oil and gas prices to return to pre-Covid levels next year but insists that the world still has an "insatiable" desire for energy.

Looking ahead, Mr Crouch said with oil and gas prices expected to remain high for the foreseeable future, he does not “see a radical change in market conditions for oil super-majors in the coming months”.

“However, we are bracing ourselves for any shock announcements from Cop26 that may cause short-term price volatility for London-listed oil giants such as BP and Shell," Mr Crouch said.