Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

BP needed to do quite a lot to impress investors when it reported its results for the second quarter today. BP’s share price has gone nowhere since the spring, despite a persistent upward trend in the oil price. In addition, last week’s surprise news from Shell of a 38% rise in its quarterly dividend has stolen a lot of the recent limelight¹.

BP’s 4% dividend increase today looks paltry by comparison. BP and Shell took large axes to their dividend payments in 2020 that shaved two thirds off Shell’s quarterly payouts and 50% off BP’s.

However, a US1.4 billion share buyback financed by surplus first-half cash flows at BP goes some way to making amends, as do pledges to finance further buybacks and dividend increases through 2025 so long as the oil price stays around US$60 per barrel2.

In the second quarter, BP courted shareholders wary about sustainability issues by expanding its solar development pipeline in the US by a substantial 9 gigawatts – right in ExxonMobil’s Texas backyard. It also agreed to buy the Midwest stores operator Thorntons, which will raise its presence in the areas of convenience shopping and vehicle charging points.

Overarching all of this though were the effects of US$70 oil, coupled with oil demand recovering to pre-pandemic levels. Going green may be the future, but fossil fuels remain the predominant here-and-now.

BP’s underlying replacement cost profit – its preferred earnings measure – recovered to US$2.8 billion in the second quarter compared with a loss of US$6.7 billion for the same period a year ago. Operating cash flow increased to US$5.4 billion, from US$3.7 billion3.

Presuming the company can continue to deliver earnings and cash flows of this magnitude or better over coming quarters, the BP share price may yet be too low. There were signs this morning that others may agree this is the case, as the shares responded positively to these results.

BP, like Shell, still has a delicate balancing act to perform if it is to successfully transition to an integrated energy company, without neglecting its core fossil fuel assets. With oil demand buoyant once more and the world economic recovery still at an early stage, it certainly won’t want to do that.

However, BP trades on just 1.1 times the value of the assets on its balance sheet and offers an attractive dividend yield of around 5.4%, which has been fortified by resurgent cash flows as well as last year’s decision to rebase payouts4. That looks like good value given the current favourable backdrop of vaccine rollouts and people travelling more.

Being an important constituent of the FTSE All-Share Index, BP finds a home in many UK funds, be they charged with delivering growth or income or a combination of the two. Fidelity Select 50 favourites Franklin UK Equity Income Fund and Liontrust UK Growth Fund both hold overweight positions in BP (3.6% and 3.4% respectively) compared with an Index weighting of 2.6%5.

More on BP

Source:

1 - Royal Dutch Shell, 07.07.21
2,3 - BP, 03.08.21
4 - Bloomberg, 03.08.21
5 - FTSE Russell, 30.06.21

Important information: Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Select 50 is not a personal recommendation to buy or sell a fund. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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