Although it didn’t disclose its quarterly earnings, the British-based energy giant said higher energy prices, strong trading revenue and the successful sale of assets helped the company reduce its net debt to about US$35-billion during the quarter – putting it about a year ahead of schedule for debt reduction and setting up the prospect of share buybacks this year.
The shares have risen 4.5 per cent in New York over the past two days.
Comparing BP with the likes of Suncor Energy Inc. and Canadian Natural Resources Ltd. in some ways doesn’t work. BP is shrinking in some areas (it sold its petrochemical business last year for US$5-billion), while Suncor and Canadian Natural Resources, two of the leading Canadian oil producers, have been expanding amid industry consolidation.
As well, BP operates globally while the Canadian companies have remained largely focused on the oil sands – where Western Canadian Select crude (WCS) is the benchmark price for oil, rather than Brent (the global benchmark) or West Texas Intermediate (WTI, the U.S. benchmark).
Nonetheless, BP’s remarks this week could resonate well beyond the company if they imply that oil producers are benefiting from the recovering global economy and rising commodity prices.
The remarks could also lift investor sentiment more broadly, simply because they offer a remarkable turn from recently released year-end results for major oil producers. In 2020, BP, Exxon Mobil Corp. and Chevron Corp. reported a combined loss of more than US$45-billion, driven by weak energy demand, low oil prices and large write-downs.
Exxon’s chief executive officer, Darren Woods, said that last year presented “the most challenging market conditions Exxon Mobil has ever experienced.” Some observers warned last year that demand for fossil fuels might never fully recover – no doubt leaving many investors wondering if Canadian oil producers were doomed.
Now, though, WTI is trading close to US$60 a barrel. Although the price is down from a recent high last month of nearly $66, the price has soared more than 50 per cent since the end of October.
WCS, the Canadian benchmark, is trading at more than US$49 a barrel – reflecting a relatively narrow spread of about US$10 with WTI, compared with a gap of more than US$40 at the end of 2018.
The commodity rebound comes as the global economy recovers and the U.S. administration of President Joe Biden proposes an ambitious infrastructure plan valued at more than US$2-trillion.
Jamie Dimon, CEO of JPMorgan Chase & Co., said In his annual letter to shareholders this week that U.S. stimulus spending could lead to a “Goldilocks moment” for the U.S. economy, defined by sustained growth and gentle inflation.
As well, the Organization of the Petroleum Exporting Countries and non-OPEC producers led by Russia recently agreed to maintain most of their pandemic production cuts, limiting supply even as demand picks up.
Citigroup expects the price of WTI will remain high this year, averaging US$66 a barrel in 2021, up US$5 from its previous forecast.
“Our upward revisions to oil prices do not so much reflect demand – where the recovery has been largely in line with our expectations – but the constraining actions of OPEC+/Saudi Arabia. Inventories are drawing down at a faster rate than we had anticipated,” Michael Alsford, an analyst at Citigroup, said in a note.
Investors may be waking up to this improving backdrop. Jeremy McCrea, an analyst at Raymond James, pointed out this week that the iShares S&P/TSX Capped Energy Index exchange-traded fund has been receiving more inflows than other iShares sector ETFs, including financials and information technology.
“The strong first-quarter share performance (up 26 per cent) is likely to attract more momentum-type funds, especially as commodity prices hold and company fundamentals (leverage, valuation) continue to look stronger,” Mr. McCrea said in his note.
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