BP looks set to return more money to shareholders as it beats expectations

Oil major BP has said that it expects to start buying back its own shares again, after hitting its targets for reducing its debt load earlier than anticipated.

“We are pleased to announce that we now expect to have reached our $35bn net debt target during the first quarter 2021,” said BP’s chief executive, Bernard Looney. “This is a result of earlier than anticipated delivery of disposal proceeds combined with very strong business performance.”

Net debt at the end of 2020 was $38.9bn, meaning that BP has sliced nearly $4bn off its debt pile in the past three months.

The group will update with more detail when it reports on its first quarter results at the end of this month (27 April). For now, BP noted that it is committed to “returning at least 60% of surplus cash flow to shareholders by way of share buybacks, subject to maintaining a strong investment grade credit rating.”

So why has net debt declined so rapidly? BP made more money from selling assets than it had expected. Deals included the sale of a petrochemicals business to global chemical giant Ineos, the sale of a stake in software group Palantir, and the raising of more than $2.4bn from the sale of an Omani gas development. As a result, the group now expects sales proceeds to hit the upper range of its earlier $4bn to$6bn estimate.

The group also benefited from the strong rebound in the oil price earlier this year.

What does this mean for your portfolio?

BP’s share price cheered the unexpectedly positive announcement, gaining around 3% to trade at around 300p a share.

As Mark Nelson of Killik notes, the shares still look reasonably priced “on a price to December 2021 earnings ratio of 11.3 times” plus “a prospective dividend yield of 5.3%”. Meanwhile AJ Bell analyst Danni Hewson reckons that the share buybacks raise the “prospect of more generous returns to shareholders”.

Long story short, if you hold BP already – and we’ve been pretty positive on oil stocks so a lot of you probably do – this is another reason to hang on. And even if BP isn’t your preferred play, we’d suggest having some exposure to the sector – fossil fuels will be around for a while longer and the market still doesn’t look to have priced in all of the rebound potential from the Covid-19 lockdowns.