With oil prices at their highest level since July 2015, BP (BP.) today gave the clearest signal yet that it is ready to loosen its grip on shareholder returns.
The FTSE 100 giant reported that its oil price balancing point for covering costs and dividend was $49 a barrel, whereas the current price stands at around $60.
This has given the oil major room to trigger a resumption of share buy-backs to offset the dilutive effect of the second quarter scrip dividend issued in September. The scrip was put in place in 2010 as an undiscounted alternative to the cash dividend.
Uptake of the scrip dividend option has been around 20%, which has provided BP with some financial flexibility during the transition to lower oil prices.
But looking further out to 2021, chief financial officer Brian Gilvary said there was potential for the organic cash balance point for the group to reduce steadily to around $35-40 per barrel.
He said: “With free cash flow growing, we would then aim to ensure the right balance between disciplined investment and distributions growth, depending on the context and outlook at the time.”
Today’s quarterly dividend was maintained at 10 cents a share as BP beat City expectations with an underlying replacement cost profit of $1.9 billion (£1.4 billion), against $684 million (£519 million) in the previous quarter.
The performance was helped by the highest downstream earnings in five years, alongside the start of production for three new upstream projects in Australia, Trinidad and Oman. Over the first nine months of the year, upstream production was 10% higher than a year earlier.
In downstream, BP delivered double digit earnings growth from fuels marketing in the first nine months. Premium fuel sales volumes have continued to grow and BP’s convenience partnership model has been rolled out to more than 170 retail sites worldwide so far this year.
Chief executive Bob Dudley said: “There is still room for further improvement and we will keep striving to increase sustainable free cash flow and distributions to shareholders.”
His comments and profits figure helped BP shares gushed as high as 522p Tuesday, a price not seen since June 2014 and around levels last traded in the aftermath of the Deepwater Horizon disaster.
UBS analyst Jon Rigby, who has a ‘buy’ rating and price target of 525p on the shares, said the re-commencement of the share buy-back reflected excellent operational and financial progress.
He said: “We were expecting this to begin some time in 2018 and today’s announcement is a very positive surprise, emphasising the progress made in the reset of the BP in the aftermath of Macondo and in the context of lower oil prices.”
Gulf of Mexico oil spill payments were $600 million in the third quarter, which is significantly lower than in the first two quarters of the year. Payments over the first nine months of 2017 were $4.9 billion.
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