Why We Believe BP’s Stock Is Worth $41

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BP Plc. (NYSE:BP) is one of the world’s leading oil & gas companies, with operations all across the globe. The company has been hit hard by the current downtrend of low crude oil prices and its average price realizations in both upstream and downstream segments have suffered as a result. Consequently, we believe that BP’s Trefis adjusted total revenue for the year 2015 will decline by 36% as compared to last year and amount to $253.5 billion (Calculated revenue figure not subjected to any intersegment elimination). However, we believe that a gradual recovery in oil prices in subsequent years will lead to a period of growth in BP’s revenues and the company’s revenues will be just shy of $350 billion by the end of our forecast period. Our price target for BP stands at $41, implying a premium of more than 35% to the market. In this article, we try to analyze some of the key drivers we have used in our valuation of BP.

See Our Complete Analysis For BP

Oil Prices Will Hurt BP’s Average Realizations Per Barrel In Near Term

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BP’s upstream operations constitute around 52% of the stock’s value, according to our estimates. We calculate that the company generated $44.4 billion in adjusted upstream revenues in 2014. (We only consider revenues derived from Exploration & Production activities and eliminate Midstream revenues from company reported Upstream numbers) However, the extended period of low crude oil prices has hurt the company’s upstream operations in 2015. Even though BP has increased daily crude oil and NGL production by 9% in 1H-2015 compared to 1H-2014, the company’s average price realized per barrel of oil equivalent (BOE) has dropped to $51 as compared to $97 in the previous year period. [1] The average crude oil price has remained below $60 for the year to date and we believe that prices will not experience any significant recovery for the rest of the year due to the ongoing production related stand-off between OPEC and Non-OPEC producers. Consequently, we believe that BP’s Average Crude Oil & NGLs Sales Price will amount to less than $50 for the year 2015 and will subsequently witness a gradual recovery throughout our forecast period.

A similar story has played out in BP’s downstream operations as well and Trefis estimates that the company’s Average Price Realized On Refined Products has dropped more than 30% in 1H-2015 as compared to the year ago period. [1] We believe that this figure will remain just below $75 for 2015 before staging a recovery in later years. As a result of this rapid decline in realizations in both upstream and downstream sectors, we believe that BP’s total revenue for the year 2015 will decline 36% and amount to $253.5 billion. Please note that the calculated revenue figure has not been subjected to any intersegment elimination.

BP Curtailing Capital Spending Amid Lower Oil Prices

Controlling capital expenditures while maintaining modest growth prospects, are the highest priorities for BP right now, primarily due to the changed crude oil price environment. In the past few years, the company’s total capital expenditures have increased from around $20.3 billion in 2009 to almost $23.8 billion in 2014. [1] However, the recent decline in global crude oil prices has forced BP to increase its focus on constraining both capital and operating costs in order to maximize its returns in the current commodity down cycle. The company has slashed its short to medium term capex budget by about 20% and has plans to divest $10 billion in assets by the end of 2015. [2] [3] In addition to lower net capital spending in its upstream business, where the company is prioritizing value over volume, BP is also targeting significant efficiency improvements in its downstream business. The company plans to deliver annual cost savings of around $1.6 billion from its downstream operations by 2018, versus a 2014 baseline. [4]

Going forward, we expect BP’s Net Upstream CapEx to decline in absolute terms for 2015, as the company continues to reduce spending and make progress on its ongoing divestiture plan of $10 billion. However, the figure as a % of revenue will go up due to the significant decline in 2015 revenues. Beyond 2015, we expect Net CapEx % of Upstream Revenue to gradually decrease throughout our forecast period. This is because even though the CapEx will grow modestly in absolute terms as the company ramps up investments in new projects, the growth in company revenues will be greater than the growth in CapEx because of the gradual recovery in oil prices.

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Notes:
  1. BP’s SEC Filings [] [] []
  2. BP Posts Quarterly Loss Amid Oil Price Rout, February 3, 2015, Wall Street Journal []
  3. UPDATE 2-BP profits slump after huge oil spill charge, 28 July 2015, Reuters []
  4. Full Year Results & Investor Update, February 3, 2015, BP Investor News []