BP: having a good war — but losing battles for hearts and minds

BP’s third-quarter investor conference call began with contrition for a fatal fire. The UK-listed oil major made no apology for strong results. Finance director Murray Auchincloss had a successful general’s swagger. Adjusted net income of $8.1bn beat expectations by 30 per cent. BP now stands for “bumper profits”.

No wonder there is a clamour for higher windfall taxes. Record profits are painting targets on the backs of BP and its peers. At least the UK government has not labelled BP and Shell “war profiteers”, as President Joe Biden has done with US groups.

BP’s gas and low carbon unit was its biggest triumph — or perhaps, greatest embarrassment. Underlying profits more than tripled year on year to $6.2bn. Much of this appears to have come from gas trading as Russia reduced supplies.

BP inevitably believes it pays enough tax. Effective tax rates for BP, Shell and France’s TotalEnergies are well over 30 per cent. That is some 10 percentage points above US peers, according to S&P Global data.

Lex opposes windfall taxes, sops to populism that distort tax policy and deter foreign investment. But the tax threat is already weighing on BP’s valuation. Its forward enterprise value to ebitda multiple sits under 3 times, near decade lows. Net debt, a worry for shareholders a year ago, has eased to less than half this year’s expected ebitda.

The balance sheet has not looked stronger since 2010, notes Citi’s Alastair Syme. Tell that to the market.

Big dividend payouts stoke resentment higher one-off renewables investment might have damped. The bind for BP is that investors strongly prefer the former.

High oil prices are producing plentiful free cash flow, approaching $27bn for the full year. Some of this will go into green energy. BP claims renewables will absorb up to 40 per cent of capital spending by 2025, rising to 50 per cent by the end of the decade.

A chunk will pay for acquisitions. BP recently bought the US Archaea landfill biogas business for $4.1bn. Unlike most renewables projects, Archaea will add to group earnings by 2024.

Soldiers sometimes talk wryly of “having a good war”. BP is doing unironically well from conflict-induced price spikes. It is losing the battle for hearts and minds on two fronts: tax and renewable investment.

The Lex team is interested in hearing more from readers. Please tell us what you think of BP’s results in the comments section below