BP blasts shareholders

BP BP 1.60%

was the only oil major to raise its dividend after this spectacularly profitable quarter. That raises a potential red flag, but the company can probably afford the big ones.

Like its peers, the British energy giant beat forecasts in the second quarter thanks to strong commodity prices, refining margins and gains from oil trading. It generated $10.9 billion in operating cash flow and reduced its net debt for the ninth straight quarter. It also boosted shareholder returns, adding another $3.5 billion in share purchases and increasing the common dividend by 10%.

Oil producers have an unfortunate history of plunging when crude prices are high, only to regret it later. BP Chief Executive Bernard Looney acknowledged the point on Tuesday: “We are very focused on making sure our investors and owners can rely on this dividend,” he told analysts.

These are boom times. The Big Five oil companies—BP, Chevron,

ExxonMobil,

Shell and TotalEnergies TTE -2.25%

— generated nearly $80 billion in combined cash flow from operations and announced an additional $16.5 billion in acquisitions. All emphasized capital discipline while shedding debt and largely sticking to target ranges for capital spending. Apart from BP, they did not raise their dividends this quarter, which unlike buybacks amount to long-term commitments to shareholders.

Some investors may worry that BP is resorting to unsustainable boom spending. The payout is only really valuable to investors if they know it will last. Both BP and Shell have come under pressure to raise their dividends since cutting them in 2020 when oil prices fell in the early stages of the pandemic. Shell has resisted this quarter, but BP’s increase takes its final dividend yield to 5.5%, near the top of the range.

Managing future cash flows is difficult for all major oil companies. They must balance long-term horizons for investment and production in a volatile price world where many question how long current levels can last. European majors in particular have the added challenge of running their traditional fossil fuel businesses to finance relatively aggressive shifts towards uncertain clean energy businesses that are expected to have lower margins and volatility.

BP has some of the most ambitious plans to create clean energy. At the same time, it wrote off $25.5 billion in Russian assets last quarter, which were more than half of its restricted reserves and about a third of its reported oil and gas production. Replacing that profitable Russian production could be difficult, although BP focuses 80% of its oil and gas investments in six relatively high-margin areas. It also has ongoing payments for the Deepwater Horizon accident.

U.S. natural gas prices have reached a record high and show no signs of abating. This is largely because oil companies no longer have the incentive to drill more as oil prices rise. WSJ’s Dion Rabouin explains. Composite photo: Ryan Trefes

However, it is comforting that the company stayed within the financial framework it set in 2020 when times were tough. Management says its increased dividend is sustainable in a world where oil is $40 a barrel and Henry Hub natural gas is $3 per million British thermal units, which leaves plenty of breathing room. Additional acquisitions will also reduce the future dividend burden, and BP’s debt reduction also gives it more flexibility.

All major oil companies are rebuilding their reputation as income stocks after the trauma of 2020. BP has chosen a slightly riskier path than its peers, but it doesn’t seem to be losing its head.

Write to Rochelle Toplensky at rochelle.toplensky@wsj.com

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