BP (LON: BP) shares are, surprisingly, up 1.5% this morning on their Q1 report of a $20.4 billion loss. Given that we much prefer our investments to not make a loss, why are we seeing this positive reaction? The answer is that this is all about getting out of Russia and that Rosneft investment.
One reason, a minor one though, for the BP share price rise is the announcement of a buyback programme. BP will buy back up to $2.5 billion of its own shares between now and 1 August. True, it wasn’t known before this morning that this would happen, but it was always highly likely. High oil prices just are a good time for an oil company to be returning capital to shareholders.
The important part of the results themselves is not the reported $20.4 billion loss. Instead, it’s the replacement cost profit of $6.2 billion. This is as against the $2.3 billion profit for Q4 2021 (which was $4.1 b on that replacement basis). That’s not a complete guide to the corporate performance – in a resources company like BP, no one number does capture everything – but it’s a much closer guide to the performance of the business.
What drags that operating profit at replacement prices into that stonking loss is the adjusting items of minus $30.8 billion. This is mostly made up of that decision to exit Russia: “Adjusting items include pre-tax charges of $24.0 billion and $1.5 billion as a result of the loss of significant influence and bp's decision to exit its 19.75% shareholding in Rosneft and its other businesses with Rosneft in Russia respectively.”
Even then we might expect rather more of a move in the share price except for two factors. One is that this is all well trailed. We already knew that BP was getting out and that the entire value of the investment was to be written off. We knew because we’d been told it, of course.
The second reason is something that few are talking about. That Rosneft investment is now on BP’s books at a value of nothing. But it hasn’t actually been sold – nor given away – or anything. So we might assume that there will be some value gained for it at some future date. What it will be probably depends on how long this all goes on, how long sanctions remain and so on. But the idea that recovery will be absolutely zero is stretching matters a little. We could well see a write back at some future date.
In effect, the market has already absorbed the influence of the Russia loss, which leads to that $20.4 billion. It’s also obvious enough that oil prices will have increased operating profits over the period. So, there’s little new in BPs accounts, so little movement in the BP share price.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.