VALUATION HIGHLIGHTS

1. Customers & Products constitute 80% of the Trefis price estimate for BP's stock.
2. Natural Gas constitute 18% of the Trefis price estimate for BP's stock.

WHAT HAS CHANGED?

1. BP Saw A Mixed Q3 Report

BP's sales and other operating revenues of $55.11B (+52.4% year-over-year) missed the estimates by $5.82 billion but its adjusted EPS came in at $2.59, 64 cents above the consensus estimates. BP's underlying replacement cost profit was $8.2 billion in Q3 2022, compared with $8.5 billion for the previous quarter. Compared to the second quarter, the result was impacted by weaker refining margins, an average oil trading result, and lower liquids realizations, partly offset by an exceptional gas marketing and trading result and higher gas realizations.

While oil & gas prices are likely to be marred by geopolitical risks of the Russia-Ukraine war, even the EIA (U.S. Energy Information Administration) expects prices to calm down in the coming years. BP's strategy to execute buybacks, lower net debt, and expand its low-carbon energy business to assist cash generation as benchmark oil prices trend lower makes sense.

Historically, BP's earnings have been primarily dependent on the oil & gas business resulting in fluctuating asset returns, largely in line with benchmark oil prices.

2. Q4 Guidance

During the third quarter, BP generated a surplus cash flow of $3.5 billion and intends to execute a $2.5 billion share buyback prior to announcing its fourth-quarter results, bringing total announced share buybacks from 2022 surplus cash flow to $8.5 billion, equivalent to 60% of 2022 surplus cash flow year-to-date. To add to this, BP expects fourth-quarter 2022 upstream production on a reported basis to be slightly lower compared with the third-quarter 2022, primarily in its gas regions.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of BP's value that present opportunities for upside or downside to the current Trefis price estimate for BP:

• Average Crude Oil & NGLs Sales Price: BP's average liquids sales price increased from $58 per barrel in 2019 to $63 per barrel in 2021. Given the volatile energy price environment, a 30% decrease in benchmark prices from ~$80 would lead to a nearly 10% contraction in BP's value.

For additional details, select a driver above or a division from the interactive Trefis split for BP at the top of the page.

BUSINESS SUMMARY

BP is one of the world's leading oil & gas companies with operations in more than 80 countries, providing customers with fuel for transportation, energy for heat and light, retail services, and petrochemical products for everyday items.

As a global player, BP's operations and activities are held or operated through a variety of structures, including subsidiaries, jointly controlled entities, or associates established, which are subject to the legal systems of many different jurisdictions. The company's operations cover two main business segments: Exploration & Production (or Upstream) and Refining & Marketing (Downstream). BP also has some presence in the alternative energy space through its activities in biofuels, wind, solar, hydrogen power, and carbon capture and storage (CCS).

SOURCES OF VALUE

Large base of proved reserves

Proved reserves are an extremely critical metric for an oil and gas exploration and production company. It represents the total quantity of technically and economically recoverable oil and gas reserves owned by the company at a given point in time. It directly impacts the company's production growth outlook. At the end of 2021, BP's total proved reserves stood at over 16.95 billion oil-equivalent barrels (both developed and undeveloped). These reserves consist more of more-profitable liquids (crude oil and natural gas liquids).

BP's changing asset base

Per the company's capital investment plan, low-carbon energy and mobility solutions businesses are likely to attract around 40% of the total investment by 2030. Notably, newer businesses and conventional hydrocarbons will receive a capital allocation of $5-7 billion and $9 billion, respectively. Anticipation of higher profits from the convenience & mobility business is the key reason behind this shift. Per reports, hydrocarbon, convenience & mobility, and low-carbon electricity businesses are expected to generate ROACE of 13%, 17%, and 9%, respectively.

KEY TRENDS

Peak oil

It is estimated that a large part of the world's oil reserves has already been discovered. Recent statistics have indicated that global consumption has been outpacing reserve additions. Peak oil is a commonly used term to describe the point at which world oil output will reach a maximum and decline afterward.

However, many institutions, such as the International Energy Agency (IEA), believe that peak oil will not occur for another 25 years at the very least. Many governments across the world are promoting alternative energy measures to ensure that the supply and demand of energy will be met at all times to come.

Improvements in technology

Due to limited underlying growth in product demand, there has been an increase in recent years toward increasing the complexity of refineries rather than expanding capacity. In the U.S., no new refineries have been built since 1980. However, improvements in process design and technology have seen capacity increase by around 1% per year.

The early refineries that were established were mainly used to process light sweet crude, resulting in an increase in demand for light sweet crude. As a result of higher oil prices in recent times, heavy crude oil is becoming more economically attractive. In addition, the interest in the development of new cost-effective methods for extracting and transporting heavy crude oil for refining into valuable light and middle distillate fuels is also increasing.