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BP shines as sole Q2 earnings outperformer among top majors

Capital expenditures, share buybacks, rising Permian production and planned divestitures were several of the key themes discussed by executives on the integrated oil and gas majors' second-quarter earnings calls, as weaker energy prices weighed on downstream and chemical margins and overall second-quarter earnings proved disappointing, analysts said.

BP p.l.c. was the outperformer among the top majors and the only company to see normalized earnings per share top analysts' estimates, coming in at 14 cents per share, or 7.7% higher than S&P Global Market Intelligence's consensus projection of 13 cents per share.

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Second-quarter earnings were pushed higher at BP in part by a surge in U.S. output following its $10.5 billion purchase of shale assets from BHP Group in late 2018. The London-based company's overall upstream production in the second quarter rose 6.5% year over year.

BP is on track to add 900,000 boe/d of production by 2021 from new projects brought on stream since 2016 in which it is either operator or a partner, with four out of five projects planned for startup this year already on stream. But ongoing divestitures by BP will be key to deleveraging and increasing shareholder returns.

The company's indebtedness reached 31% at the end of the second quarter, coming in above its own 20% to 30% guidance level, a sticking point for analysts despite BP's overall positive metrics for the period.

"We believe gearing has likely peaked and see multiple near term catalysts including a dividend increase, share repurchases to offset scrip dilution and deleveraging from divestments," Jefferies analyst Jason Gammel said in a July 31 research note,

Like BP, Exxon Mobil Corp. and Chevron Corp. plan to keep hiking upstream output, particularly from the Permian Basin, as they look to divest large chunks of assets to drive earnings and cash flow in the next several years.

While expanding its upstream reserve base and continuing to sell off non-core assets worth between $5 billion and $10 billion as part of a three-year plan, Chevron plans to maintain stricter capital spending than Exxon, earmarking between $18 billion and $20 billion in 2020 and between $19 billion and $22 billion annually from 2021 to 2023.

As its Permian operations continued to improve, Chevron resumed its share repurchase program in the second quarter, with market analysts anticipating the company will be near cash break-even in the region this year and will generate more than $1.0 billion in free cash flow in 2020.

"Cash flow should rise because 70% of Chevron's 2019 capital program ($20 billion) is slated to be cash generative within two years, as major capital projects are completed and production from shale and tight oil increases. Shareholder distributions as a percentage of cash from operations and asset sales are expected to approximate 45% between 2019-2023 at $60 Brent," Evercore ISI analyst Doug Terreson said in an Aug. 5 note.

Exxon, on the other hand, reaffirmed during its Aug. 2 earnings call it plans to spend $30 billion this year and $33 billion to $35 billion in 2020. Amid this lofty spending plan, asset sales will be integral for Exxon to sustain earnings and cash flow and unlock shareholder value.

"Change in this area is important as the company has underperformed peers over five and ten years in this area of potential value capture," Terreson wrote in a separate Aug. 5 research note. "Withdrawal of capital from low-return assets with re-deployment into areas of higher potential or share repurchases represents a significant financial opportunity for ExxonMobil's shareholders."

Exxon will focus on returning dividends to shareholders but has no immediate plans to repurchase shares, executives said on the Aug. 2 earnings call, unlike many of its counterparts including Royal Dutch Shell PLC, which proved to be the quarter's underperformer in the sector.

According to S&P Global Market Intelligence, Shell missed its second-quarter analyst EPS forecast by a whopping 30% but said it kicked off the next phase of its buyback program, in which it plans to repurchase shares worth a maximum $2.75 billion through the end of the third quarter. Shell's cash flow — used for dividends and share buybacks — slipped to almost $6.9 billion during the period.

Shell intends to complete its $25 billion buyback plan by the end of 2020, Shell CFO Jessica Uhl said during the company's July 31 second-quarter earnings conference call. The Anglo-Dutch major was one of the first to start a share repurchase program in 2018 as oil prices started to recover after languishing for three years.

Having completed its $30-billion two-year, non-core asset divestiture plan at the end of 2018, Shell expects to sell off more than $5 billion each year in 2019 and 2020 and an additional $20 billion from 2021-2025.