BP’s share price recently rallied thanks to the company’s booming second quarter earnings. Underlying replacement cost profit - which is a standard profit metric for oil companies – surged by a whopping 203% to $8.5 billion, which sailed past the $6.3 billion that analysts were expecting. Keep in mind, the first quarter profit was $6.2 billion, so it is a considerably big jump in the three-month window. The quarterly dividend was lifted by 10% to 6 cents. Shareholders were also treated to a share buyback programme of $3.5 billion, up from the $2.3 billion carried out in the first quarter. The move should help keep investors onside. In an era of higher bond yields, a rise in dividends makes the stock more attractive as investors are looking for higher returns on account of surging inflation.
BP used the stellar oil market as an opportunity to cut its debt by $10 billion. By reducing its loans, it is a way of avoiding higher repayments as we are in an environment of rising interest rates. Also, by lowering its debt to equity ratio, the group is making itself more nimble and that should help the group if we see a downturn in the energy market. In late 2015/2016, there was a brutal fall in metal prices, and mining companies that were over leveraged suffered the most, so it seems as if BP are strengthening their balance sheet to shield themselves as there are fears the global economy is cooling.
The underlying oil market typically pushes the BP share price around. Last week, WTI briefly hit a six-month low. Worries about waning demand due to high inflation and rising interest rates hurt the energy. The actions of OPEC+ will remain in focus. At the start of August, the body revealed it will lift output by 100,000 barrels per day from September, and that was nowhere what traders were expecting as some had hoped for a 300,000-400,000 BDP rise. Oil producing nations clearly benefit from high oil prices but at the same time, they should be adapting to the current climate. Elevated oil prices are a big factor in rising inflation, which is slowly eroding demand. If OPEC+ keep the oil price at relatively high levels, that might lead to demand destruction.
BP’s share price has been pushing higher in the past few weeks and while it holds above the 385p area, the bullish move could continue. Resistance might be encountered at 441p, and a break above that level could see it hit 455p. A drop below 385p, might pave the way for 359p to be tested.