BP (LSE:BP) seems to be getting stronger, with positive sentiment building on the release of cautiously upbeat second-quarter results yesterday that beat estimates. Its share price rose, up 3%+ Tuesday, with production solid thanks to the launch of four major new projects.
Oil and gas production was up 4% for the second quarter, from the same period last year, the firm producing approximately 3.8m barrels per day.
Any other positive news? Well, last year BP agreed to buy US shale oil and gas assets from global miner BHP Group for $10.5bn, its biggest deal in almost 20 years. Another takeaway from its interim results was that it has now made its final acquisition payment, a significant milestone to have out the way.
The most appealing aspect of BP is unquestionably its dividend. With a yield of over 6% it is one of the highest paying dividends in the FTSE.
Why does a US rate cut matter to the UK?
But positive sentiment towards BP is not only about what is happening at the company itself. The wider price of oil has a direct effect on the share price of oil companies such as BP and US interest rates are also relevant because they affect the oil price. For the first time in more than a decade, the US Federal Reserve is set to cut interest rates today, which is a pretty big deal for oil giants. If the rate cut is big, the oil price should rise and with it, BP’s share price.
“Oil prices rise as market eyes a likely FED rate cut”. This and headlines like it, seem to me to have been appearing daily for quite some time now, with the price of oil yo-yoing in response to the rumours.
Oil price fluctuations
But (yes, there is always a ‘but’)… on the other side of the coin, high levels of oil in storage risk pushing the oil price down so BP cannot rest on its laurels just yet. Barrels of crude in storage are creeping higher, with over 110m barrels stored today and this will continue to rise while conflict between the US and Iran continues. News broke last week that tankers are offloading millions of barrels of Iranian oil into storage tanks at Chinese ports. The Chinese are the world’s biggest buyers of crude oil and excess stored oil causes the price to fall, which would push down the share price of BP and its competitors.
Is the share price surge temporary?
The long-term outlook for oil giants such as BP is clearly uncertain. This recent Fool article “Will oil prices ever recover?” paints a worrying picture. However, BP has a plan and is less vulnerable than some. The plan includes a portfolio of new field developments due to come on-stream in the coming years. Plus it bases its financial expectations on an oil price of approximately $55 per barrel, so anything above that offers a comfortable operating position. Astronomical debt levels with net debt at $46.5bn are an issue though.
That said, I feel positive overall. With a weakening pound, I think UK investors can look favourably on dollar paying companies such as BP. If you’re looking for rich dividends, then BP is a good pick, but for how long is debatable.
