BP Plc (BP) stock was higher in early trading after the major oil company reported a stronger-than-expected fourth quarter before the market open, adding a comfortable 2.5% dividend boost and a moderately bullish outlook to placate investors.
"BP delivered an outstanding set of fourth quarter results, and we expect the shares to respond accordingly," Morgan Stanley analyst Martijn Rats said.
Macro MoverMaybe most vital to the stock implication was CEO Bob Dudley's comments on a brightening macro environment after oil was among the worst performing sectors in 2018.
The impact of the tough 2018 was addressed by Dudley first, noting rising inventories, record U.S. oil supply, the U.S. grant of Iranian waivers, and a lack of cuts from OPEC.
"Together, these saw the Brent oil price fall from a four-year high in October of $86 per barrel to around $50 by the end of the year," Dudley explained. "Looking to 2019, the Brent oil price has improved to around $63 as OPEC plus have started to implement their decision to reduce production for the first half of 2019. On supply, U.S. tight oil is expected to continue to grow strongly, especially in the second half of the year as new pipeline infrastructure is introduced."
The tighter supply environment for BP is especially beneficial as its break-even price on oil is far below its peers, allowing it to deliver more returns to shareholders should prices stabilize or burn higher.
Dudley was also positive on the prospects for demand, quelling concerns that abounded as Chinese GDP slowed to its lowest pace of growth in 28 years.
"On demand, we expect growth to remain above average, supported by continuing gains in China and India," he said.
Still, Dudley noted that Venezuela remains a point of uncertainty that could provoke more volatility if an amenable solution is not reached.
The risk intensified shortly after Dudley's comments as the Lima Group (Argentina, Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, Honduras, Panama, Paraguay and Peru) all aligned in opposition to Venezuelan president Nicolas Maduro, and called for the international community to restrict trade with the South American nation for oil and gold.
"It's really about OPEC," CFO Brian Gilvary said, calming concerns on the much publicized macro risk.
The black spot for oil markets in Venezuela was not enough to curb analyst bullishness on the stock either.
"Our aggregated industrial thesis suggests BP's long-term upstream growth pipeline has the sector's most attractive mix of capex headroom and returns," JP Morgan analyst Christyan F Malek said Tuesday morning. "We retain our belief that new barrels and a competitive cash flow from operations/barrel of oil equivalent are key levers behind falling cash breakeven - a key prerequisite to yield compression from >6%."
He added that the company's leadership position in downstream and high margin upstream projects as key factors in his "Overweight" thesis.
Not Shirking ShaleThe company has also kept pace with its peers in shale production, echoing strong results from key peers like Royal Dutch Shell (RDS.A) , Exxon Mobil (XOM) , and Chevron (CVX) .
The plentiful supply of shale in the Permian basin helped boost BP's production, once you strip out its 20% stake in Russian state-owned oil giant Rosneft, by 8.2% in 2018.
Moving forward, the company will look to continue to capitalize on the basin, building on $10.5 billion in deals for most of BHP Billiton's (BBL) onshore U.S. oil and natural gas assets headlined by land in the oil-rich Permian basin.
"The majority of that investment will be in the Haynesville and the Eagle Ford with some in the Permian," BP Upstream CEO Bernard Looney said. "Over time, we'll probably ramp capital up to around $2.5 billion with the majority of the capital over time as the logistics constraints get lifted, shifting towards the Permian."
The BHP deal turned out to be quite a fortuitous one for BP as it was bought near oil's 2018 low.
If more deals can be made at depressed prices while oil prices remain low, the company's cash flow could present an even more bullish outlook for acquisition opportunities.
Greener PasturesBP's corporate logo may feature a lot of green, but the company is likely best known for its Deepwater Horizon disaster, which was anything but green.
The payments due for the disaster, noted as Macondo payments due to the Deepwater Horizon's overall project title, have been an albatross around the neck of BP for years.
However, as these payments are whittled down, the loss of this impact could be a share growth driver.
"Longer term, we expect cash flow to materially improve as the Macondo burden abates and the company increases production at lower break-even prices," the Action Alerts PLUS team noted in a preview of the earnings result.
The cash flow profile of the company obviously improves greatly once this persistent problem is taken out of the equation.
Further, the company has outlined its efforts to remain more responsible on emissions, protecting it from further litigation and regulatory risk.
"We set out clear targets for the first time for reducing emissions in our operations," Dudley said. "So, even as our business grows to meet growing demand for energy, our net carbon emissions will not."
The stock has remained positive on the confluence of factors, though shares have tempered gains somewhat as oil indices began to fall slightly in the pre-market hours.
