Earlier this week, BP (LSE: BP.) released its results for the third quarter of 2022. As the fifth-largest member of the FTSE 100, its trading performance always generates a lot of interest. I am wondering whether now is the right time for me to invest.
Third-quarter results
Interpreting the results of oil companies can be difficult. For example, during the three months to the end of September, BP made a loss attributable to shareholders of $2.2bn. But, for the same period, its replacement cost profit was $8.2bn. The board prefers to use the latter metric, which reflects the cost of inventories sold in the period.
We all know that oil and gas prices can fluctuate significantly from one period to another. By removing the impact of these commodity price changes, replacement cost is seen as a better measure of performance. It also more accurately reflects the underlying cash generation of the business. During Q3, BP had an operating cash inflow of $8.3bn.
Cash machine
BP’s ability to generate huge amounts of cash is the reason for its impressive share price growth in recent months. Largely on the back of rising oil and gas prices, BP’s shares are 40% higher than they were a year ago.
During the first nine months of 2022, BP generated $27bn of cash. No wonder Bernard Looney, the CEO, once described the company as “literally a cash machine“.
Some of this cash has been used to pay down its debt. At the end of Q3, BP had net borrowings of $22bn, compared to $32bn a year earlier. Net debt has now fallen for 10 successive quarters.
BP is also actively buying back its own shares to help boost shareholder returns. By the end of October, it had repurchased 677m shares, equivalent to 3.7% of the current number in issue.
The company is committed to returning 60% of its surplus cash flow to shareholders, either through share buybacks or dividends. But the surge in the share price of BP means its forecast dividend yield of 3.3% is now below the FTSE 100 average.
For planning purposes, the board assumes oil will trade at around $60 a barrel. It currently remains well above this level at $95. The last time Brent crude was below $60 was in January 2021.
Warnings
In its results announcement, BP warned of three potential dangers ahead:
- The return of Covid-19 and the possible re-introduction of restrictions affecting demand for oil and gas
- The ongoing conflict in Ukraine (although I struggle to see how further restrictions on gas flows from Russia, which put upward pressure on prices, is likely to be a problem for BP)
- The impact of inflation on the world economy
What have I decided?
With little sign of a slump in oil and gas prices, BP looks likely to remain a cash machine for the foreseeable future.
Unfortunately, my income is not as healthy. I am therefore going to have to wait until the Q4 results are released — when hopefully I will have some spare cash — before reviewing the situation once more. Otherwise, I would be investing now.
