A Look At Our $50 Price Estimate For BP

by Trefis Team
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BP Plc. (NYSE:BP), the European integrated energy company, has seen steady growth in the recent past, led by better price realization for its upstream business. Oil prices have seen a strong move this year, amid lower inventory levels due to OPEC production cuts, and other geopolitical factors. 2017 was a good year for oil companies, as growth in benchmark crude prices aided their margins. Similarly, in 2018, the average Brent crude oil price is expected to grow 30% from the 2017 average. Accordingly, we expect BP to do well in 2018.

We have created an interactive dashboard analysis which you can use to arrive at your own price estimate for the company by modifying the various drivers.

Expect Upstream Segment To See Strong Growth In The Near Term

We estimate the Oil & NGL segment revenues to grow in low double digits in 2018. While we expect only a modest uptick in the production, we forecast a low double digit growth in the average price realization for BP. Our forecast is based on the fact that OPEC and its allies have committed to production cuts throughout 2018, which will result in lower inventory levels. This, in turn, will likely keep oil prices higher, as compared to the prior year. Having said that, there is a risk of OPEC changing its course, given a surge in oil exports from the U.S.  OPEC will decide on its policy later this week on June 22. While OPEC aims to stick to its production cuts throughout 2018, it may make gradual adjustments to offset any supply shortage. This could result in increasing oil production by around 1 million barrels a day, according to a media report. Benchmark Brent oil price currently trades around $74, after crossing the $80 mark last month. The recent decline in oil prices can be attributed to the expected increase in oil production by OPEC members. We don’t expect any significant decline from the current levels in oil prices in 2018. In fact, EIA forecasts a $71 average for Brent in 2018. Price realization for oil companies is strongly correlated to the benchmark oil prices. If oil prices remain higher in 2018, as compared to the 2017 average,  it would benefit oil companies, such as BP.  Below are our core reference data for dashboards on BP’s upstream metrics.

BP Average Liquids Price Realization

BP Liquids Production

BP Average Natural Gas Price Realization 

BP Natural Gas Production

BP Upstream EBITDA Margin

Looking at the company’s other segments, we expect higher oil prices to drive refining business top line growth. We don’t expect any significant growth for downstream volume, given that higher oil prices will likely impact the overall demand. However, it will boost the average price realized for refined products, thereby aiding the segment revenue growth.

The company appears to be on a good run in the recent past, and we believe that there is still some upside to the stock price. Our $50 price estimate for BP is based on $3.20 expected adjusted EPS in 2018, and a price to earnings multiple of 15.5x. Our EBITDA forecast of $32 billion represents year-on-year growth of around 12%. Of the total expected EBITDA in 2018, we estimate $15 billion in the company’s  upstream segment, $8 billion in the midstream, and downstream operations making up for the rest. Our price estimate of $50 for BP is at a 10% premium to the current market price. Our price estimate also takes into account the company’s capital investment plan. In the wake of the improving commodity markets and its aggressive growth plans, BP now aims to spend $15-$17 billion in capital expenditure annually over the next few years. The company will also benefit from a decline in its deepwater oil spill expenses.

 

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