The weekend press reported that at today’s Strategy Review, Lord Browne, the chief executive of BP, will announce that the Company is to allocate a small %age of their burgeoning free cashflow in massively extending its huge share buyback programme. It is intended to contribute to shareholder value by boosting the company’s lack-lustre share price.
BP has already spent c£700m on share buybacks; & that figure could rise to £2.8bn by the end of the year — as much as the company spent on buybacks in the past three years combined.
Browne is expected to tell investors attending the meeting in London that the Company will press ahead with its share buyback programme as long as oil prices remain above $20 a barrel. With oil prices now around $32/Barrel, BP is generating huge cashflow and can easily afford to fund the scheme after paying for dividends and capital expenditure.
The reason for last week’s fall in the face of strong oil prices and progressive buybacks, is that fund managers wonder whether BP will be forced to follow Shell in lowering reported reserves.
Today’s meeting may well draw a line in the sand on that matter; and clear the way for the share price to once again tackle the 455p resistance level. For the past year, whilst the Market generally has enjoyed boom conditions, BP has tracked sideways in the trading box of 405-455p, still a long way short of the £6+ levels pertaining in 1998-2001; this at a time when already high oil prices are coinciding with the end of a period of high capital expenditure. Furthermore, it is now widely reported that that high oil price is likely to be considerably higher by the end of the year.
BP has proved to be a seriously under-performing investment in recent times; though it does look very much as though all that is about to change; and tomorrow’s meeting might prove to be the catalyst for that change. If so, then the herd like instinct which pervades the fund management industry, will ensure that the 455p ceiling falls. If it does so, then the price will move quite rapidly to 500p, thereafter to the first technical target of 540p.
With BP currently now at just 441p (up 5p today), we could be looking at an electrifying 22% spurt for the UK’s premier company with a Market Cap of £96bn!
IMO BP is now an extremely attractive investment, with a 3.5% yield, very little downside and the very real prospect of startling short-term upside as the share price breaks out of its one year strait-jacket. Traders may prefer to open a spreadbet; or perhaps be even more adventurous with a Covered Warrant, such as S178 @ 19p for the Dec’04 @ 500p.
One final thing. In Markets where the risks of global terrorism have always to be weighed in the balance, it is worth remembering that on the tragedy of 9/11, BP instinctively rose from £5 to £6. Bad news on the global arena may cause a tremor in the global economy, but at such times, the price of oil is highly unlikely to fall.
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