BP (BP) Last Update 6/15/22
Related: XOM COP CVX EOG
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
BP
$32.00
Yours
Trefis Price
N/A
$27.55
Market
 
Top Drivers for Period
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TREFIS Analysis


Trefis Report
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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

BP Company

VALUATION HIGHLIGHTS

  1. Customers & Products constitute 75% of the Trefis price estimate for BP's stock.
  2. Gas & Low Carbon Energy constitutes 23% of the Trefis price estimate for BP's stock.

WHAT HAS CHANGED?

  1. New Business Model

The shares of BP have retained their strength despite incurring $14 billion impairments associated with its stake in Rosneft. It has primarily been due to the high price environment, which has pushed the carrying value of inventories on BP's balance sheet and expectations of strong cash generation in the coming quarters.

In recent filings, the company reiterated its long-term profitability targets considering Brent at $66/bbl in 2025 and $73/bbl in 2030. 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. Thus, 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.

The Brent benchmark increased from $54 in 2017 to $71 in 2018, remained slightly lower at $63 in 2019, and subsequently declined to $41 in 2020. Thus, the company reported a ROACE (return on average capital employed) of 5.8%, 11.2%, 8.9%, and –3.8% in 2017, 2018, 2019, and 2020, respectively.

Given the volatile nature of the oil & gas industry, the company's strategy to increase investment in mobility and the renewable energy businesses aims to stabilize returns in the coming years.

BP's conventional hydrocarbon, convenience & mobility, and low carbon electricity businesses are expected to generate a ROACE of 13%, 17%, and 9%, respectively. Per the company's financial frame, low carbon and renewable power investments have a planned hurdle rate of 10-15% and 8-10%, respectively.

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 decreased from $90.20 per barrel in 2008 to $56.30 per barrel in 2009, as the world faced one of the worst economic downturns in recent decades. The global economy recovered, pushing BP's average realized liquids price to $73.40 in 2010, while various factors (including economic conditions and geopolitical unrest) pushed prices up above $100 in 2011, and kept prices high through 2012 and 2013, as well. However, global benchmark crude oil prices declined sharply due to slower demand growth and rising supplies. According to the International Energy Agency's (IEA) estimates, the growth in global oil demand hit a 5-year low in 2014. This coincided with record growth in crude oil supply from non-OPEC countries, primarily the U.S., at 1.9 million barrels per day. As a result, the price of the front-month Brent crude oil futures contract on the ICE declined by around 50% in the second half of 2014. Consequently, BP's Average Crude Oil and NGLs Sales Price declined to almost $89 per barrel in 2014. The low oil price environment continued in 2015 & Average Crude Oil & NGLs Sales Price amounted to $47 for the year. This fall continued to drop to $38 in 2016. However, things reversed in 2017, and the price rose to $50.
    BP's average liquids sales price increased to $58 per barrel in 2019 and rose again to $63 per barrel in 2021. Given the volatile energy price environment, a 50% decrease in benchmark prices from $120 would lead to a nearly 30% 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 is 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 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 towards 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.