The rising BP share price makes it my ultimate FTSE 100 buy-and-hold

With Brent crude back to $75, investors will have approached today's Q1 results from oil giant BP(LSE: BP) with unaccustomed optimism. Evidently, they were not disappointed, with the group's shares up a healthy 1.8% after its best results in several years.

Forecasts smashed

BP beat analyst forecasts by reporting a 71% rise in underlying replacement cost profit for the three months to 31 March to $2.6bn, smashing the anticipated $2.2bn. It also printed a 73% year-on-year rise in underlying profits before tax to $4.7bn, with growth spread across its upstream, downstream and Rosneft divisions. Upstream delivered its strongest results since the third quarter of 2014.

Reported oil and gas production rose 6% to 3.7m barrels of oil equivalent in Q1, while upstream production, excluding Rosneft, jumped 9%. BP also started production at its first major upstream project of 2018, Atoll in Egypt, and took final investment decisions on four more, in Oman, India and two in the UK North Sea.

Oil and cash flows

Operating cash flow for the first quarter was a juicy $5.4bn, up from $4.4bn in 2017. Even after excluding Gulf of Mexico oil spill payment, it was still $3.6bn. The rewards continued to flow to shareholders, as BP continued its share buyback programme spending $120m buying up 18m shares, while the quarterly dividend remained unchanged at 10 cents a share. BP offers long-term value right now.

Group CEO Bob Dudley hailed "another strong set of results" with underlying profit up 23% on the previous quarter, the best quarterly result in three years. BP is increasing output from several major new projects, and should continue to grow cash flow and returns, while setting clearer emissions targets to advance its "energy transition".

Debt difficulty

Net debt was up slightly at $40bn, against $38.6bn a year ago. Although gearing of 28.1% is within its targeted range of 20%-30%, I would like to see BP starting to shrink this mountain sooner rather than later. This could prove tricky as Deepwater payments continue, while the share buyback programme and generous dividend make further calls on its wallet. BP yields a forecast 5.3% and although cover is thin at 1.2, management should be applauded for sustaining payouts during the oil slump.

Investors have also been rewarded by steady share price growth, with the stock up 22% over the past 12 months, and 40% over two years. Royal Dutch Shell is flying upwards at the same rate.

Crude facts

Where crude goes next is anybody's guess. Further tensions with Iran could drive it beyond $80, but if President Donald Trump decides against reimposing sanctions (he has until 12 May) recent gains could instantly reverse. Either way, with Mr Dudley aiming for a break-even oil price of $40, BP is giving itself a pretty comfortable cushion.

City analysts are forecasting bumper 165% growth in earnings per share this calendar year, then a more modest 5% in 2019, justifying its current valuation of 16.1 times earnings. BP still has to shoulder hefty organic capital expenditure of up to $16bn for 2018, while keeping shareholders happy and making inroads into net debt. Yet it remains possibly the ultimate FTSE 100 buy-and-hold. Today only more so.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended BP. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.