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Oil giant BP (BP.) appears to have engineered a slick turnaround and is expected to show that not only has its net debt fallen in the first-half of the year, but it’s managed this against an expectation that debt would in fact rise further over the period.

BP had said its net debt, which stood at just under $39 billion in the fourth quarter, is set to increase in the first quarter of 2021, but that it aimed to reach its $35 billion target as early as the end of this year. However, the oil company now says that net debt will have fallen to its target of $35 billion during the first quarter.

It is all down to a “very strong” first quarter and raises the prospect that it will also now be in a position to restart share buybacks sooner than forecast as well.

It is no mean feat and is likely to be the focus of attention when the company posts its first quarter results on Tuesday, when more on this has been promised. It has said that after reaching its net debt target it would return “at least” 60% of surplus cash flow to shareholders through share buybacks, as long as it can maintain an investment-grade credit rating.

BP chief executive Bernard Looney, who has said he will provide more details on share buybacks when the company reports its first-quarter results, said the debt position “is a result of earlier than anticipated delivery of disposal proceeds combined with very strong business performance during the first quarter.”

After starting in the role last February, Mr Looney quickly pledged to turn BP into a net-zero emissions company by 2050. He took immediate action, selling assets and reshaping the business for a lower carbon future. His plan is to sell $25 billion in assets by 2025 to cut debt and pay for BP’s green energy turnaround.

The disposal of assets is something else that is likely to be highlighted in Tuesday’s announcement, with disposal proceeds already set to be at the top end of its previously announced range of between $4 billion and $6 billion.

So what’s behind this shift that has enabled it to cut its debt levels so aggressively? BP said its strong performance in the first quarter has been “driven by trading, the price environment and resilient operations”.

Capital spending has been cut by billions of dollars, costs have been dramatically reduced, and overall capital expenditure is expected to come to $13 billion in 2021.

This all comes amid a period in which BP saw a 96% fall in fourth-quarter profits as a direct result of the pandemic’s impact on global energy demand. Underlying profits on a replacement cost basis, which is the measure of income most closely tracked by oil analysts, came in at just $115 million in the three months to the end of December. That was much worse than had been expected, with the profit forecast having been pencilled in closer to the $370 million mark. And compares to the $2.6 billion generated in the same period a year earlier.

But the impact of the best part of a year of national and international lockdowns and on/off travel bans was always going to hit energy demand, and as a result the oil major’s earnings. And this is where its large trading operation, one of the largest of all the major energy firms, comes into play.

BP has said it expects this trading operation to play a significant role in the company’s profitability as it invests more in cleaner forms of energy. But little is given away about just how important trading could be to its bottom line, especially in years where oil prices fall substantially, like they did in 2020. But according to the Financial Times, Reuters reported last month that BP earned almost $4 billion from its trading operations last year, citing an internal company presentation.

Something else that will be keenly watched on Tuesday is the expected announcement on dividends. BP almost halved its third-quarter dividend to 5.25 cents a share, and that pay out was maintained in the last quarter.

BP is due to post Q1 results and make an announcement on dividends on Tuesday 27 April.

More on BP

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