BP to Restart Share Buybacks as Third-Quarter Production Rises -- 3rd Update

By Sarah Kent Features Dow Jones Newswires

BP PLC reported a healthy set of third-quarter profits and plans to restart its share buyback program Tuesday, signaling the company is increasingly comfortable with low oil prices as it ramps up its growth ambitions.

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London-based BP said it would start share buybacks in the fourth quarter, supported by strong cash generation so far this year that allowed it to cover its spending commitments and dividend at $49 a barrel.

Investors are increasingly looking at this break-even metric for signs big oil companies have succeeded in shifting their financial frameworks to operate profitably at lower oil prices. BP's plans to restart share buybacks next quarter sends a strong signal of confidence to the market.

The buybacks will offset dilution from the company's scrip program, which gives shareholders the option to take their dividend in stock. Such programs proved helpful to oil companies during the downturn, alleviating the cash burden of their shareholder payouts. But investors are increasingly eager to see companies able to fully cover their dividends with cash.

Of the majors with such programs in place, so far only Norway's Statoil ASA has announced plans to halt the program altogether and BP remains among the first to take steps to offset dilution.

While BP's replacement cost profit -- a number similar to the net income that U.S. companies report -- was $1.4 billion in the third quarter, down slightly from $1.7 billion in the same period a year earlier, its underlying financials were strong.

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The company reported its highest underlying earnings in its refining segment in five years, and saw its exploration and production unit return to profit after recording a loss a year earlier.

The company's production rose 14% year-over-year to 3.6 million barrels a day in the quarter, as new projects in Australia, Trinidad and Oman began production -- the latest in a series of developments expected to start up by 2020 that will bring the company's production back up to levels last seen before its fatal blowout in the Gulf of Mexico in 2010.

BP is still working to put the disaster behind it, after selling off billions-of-dollars-worth of assets and paying out huge amounts in fines, legal fees and cleanup costs, some of which are still ongoing. But after years of retrenchment, prolonged by the sudden slump in oil prices in 2014, the company has signaled it is ready to grow again and is able to do so with the oil price at $50 a barrel.

BP is the latest oil major to report a healthy set of results for the third quarter, signaling that the sector has made good progress in adjusting to lower oil prices. Profits at many of the world's biggest energy companies soared over the period, helped by a stronger crude market and stringent spending cuts.

Last week, Exxon Mobil Corp and Chevron Corp. both reported increases in third quarter profits of 50% compared with the prior year. French oil major Total SA saw its earnings jump 40%. Royal Dutch Shell PLC will report later this week.

The strong set of earnings plays into a run up in international oil prices to more than $60 a barrel last week -- it is highest level since 2015. That has helped lift BP's share price back to January highs when it closed in on levels last seen before oil prices crashed.

Write to Sarah Kent at sarah.kent@wsj.com

LONDON -- BP PLC on Tuesday said it would restart its share buyback program after posting healthy third-quarter earnings, the latest signal that the oil industry has found its footing amid a modest crude-price recovery.

The U.K. oil giant said its strengthened financial position allowed it to begin a share repurchase program in the final three months of 2017, though it didn't put a value on future buybacks. With Brent crude, the international benchmark, trending over $60 a barrel for the first time since 2015, BP's move ranks among the first actions showing big oil companies are healthy enough to sweeten the pot for investors who had soured on the sector.

BP hasn't had a share buyback program since oil prices crashed in 2014, falling from over $114 a barrel to less than $28 a barrel in early 2016. Other companies like Exxon Mobil Corp. and Chevron Corp. have also moved away from the practice while they grappled with the oil-price slump.

BP said it could restart buybacks because it had driven its costs so low that it can generate enough cash to cover its spending commitments and dividend at $49 a barrel. Investors are increasingly looking at this break-even metric for signs big oil companies have succeeded in shifting their financial frameworks to operate profitably at lower oil prices.

"We're confident we can balance the books at $50 next year, and even manage as low as $45. That's what gave us the confidence to raise the idea of buybacks with the board," Chief Financial Officer Brian Gilvary said in an interview.

Overall, BP's replacement cost profit -- a number similar to the net income that U.S. companies report -- was $1.4 billion in the third quarter, down slightly from $1.7 billion in the same period a year earlier. But its underlying financials were strong, sending the share price up more than 3% in London to highs not seen since three years ago, when oil prices were over $100 a barrel.

The company's refineries reported their highest underlying earnings in five years, its exploration and production unit returned to profit, and the company's oil and gas output surged 14% in the third quarter.

BP is the latest major Western oil company to report profitable results for the third quarter. Last week, Exxon and Chevron both reported increases in third-quarter profits of 50% compared with the prior year. French oil company Total SA's earnings jumped 40%. Royal Dutch Shell PLC will report earnings on Thursday.

BP's production rose 14% year-over-year to 3.6 million barrels a day in the quarter, as new projects in Australia, Trinidad and Oman began production -- the latest in a series of developments expected to start up by 2020 that will bring the company's production back up to levels last seen before its fatal blowout in the Gulf of Mexico in 2010.

BP is still working to move past the disaster, with the final tab growing past $60 billion. But with most of those payments now made, the company has signaled it is ready to grow again and is able to do so with the oil price at $50 a barrel.

Investors have been wary of big oil companies in recent years, concerned they couldn't generate enough cash to cover big dividends. BP's share buyback announcement sent a message that it was possible to reduce costs enough to fortify shareholders' rewards again.

The move "is an important signal on the confidence of the board and management on cash flow," Barclays said in a note on Tuesday.

Share buybacks are popular with investors because they reduce the amount of company stock in circulation and tend to boost the value.

For BP, the buybacks help offset perceived weakness in its dividend. The company uses a so-called scrip dividend program, giving shareholders the option to take their dividend in stock and alleviating the cash burden of dividends.

Such programs proved helpful to oil companies during the downturn, but they also dilute the value of shareholder's stocks. Investors are increasingly eager to see companies able to fully cover their dividends with cash.

So far Norway's Statoil ASA is the only major oil company to announce plans to halt the scrip program altogether and BP remains among the first to take steps to offset dilution. Mr. Gilvary said BP had discussed the possibility of removing the scrip program altogether with its board, but concluded some investors liked the option.

Write to Sarah Kent at sarah.kent@wsj.com

(END) Dow Jones Newswires

October 31, 2017 08:37 ET (12:37 GMT)