The shares of BP (NYSE: BP) have gained 25% this year assisted by rising benchmark prices and its strategic focus toward low carbon and convenience businesses. Notably, the share of capital allocation for Gas & low carbon energy segment increased from 31% in Q1 2020 to 50% in Q1 2021. Per recent filings, the company achieved its net debt target for the year, subsequently freeing up cash flows for share buybacks. From the new strategic plan, the company is utilizing operating cash and divestment proceeds to invest in new businesses and strengthen its balance sheet. In Q1, BP generated $6.1 billion of operating cash, received $4.8 billion of divestment proceeds, and utilized $3.7 billion to meet the net debt target. As the company plans to spend 60% of surplus cash in repurchasing common stock after achieving the net debt target, Trefis believes that the shares of BP would observe an upside from the move. Our interactive dashboard details the historical trends in BP’s Revenues across segments along with competitive comparisons with peers.
[Updated 01/19/2021] – BP’s Business Model Is Changing, And So Are The Key Metrics Investors Should Watch
In the past few months, BP (NYSE: BP) extended its long-term renewable energy goals by announcing strategic partnerships with multiple companies, including Equinor, Microsoft, and JinkoPower. The company will release its new organizational structure with pro-forma numbers on the renewables and mobility solutions businesses after the fourth-quarter results. With a business model that will look considerably different from what investors have been used to for decades, investors will need to look at a different set of metrics to gauge BP’s performance over the coming years.
In this article, Trefis highlights the expected trends in key metrics to gauge BP’s long-term performance and potential investor returns. Our interactive dashboard details the historical trends in BP’s Revenues across segments along-with competitive comparisons with peers.
Profitability to be driven by newer businesses
- In 2019, BP reported $283 billion of total revenues with $25 billion of underlying EBIDA (earnings before interest, depreciation & amortization excluding the impact of divestments), primarily supported by its upstream business.
- However, the company incurred $11.7 billion of impairment charges during the second quarter of 2020 – lowering the worth of its fixed assets (property, plant & equipment) by 12%.
- As the company expects Brent to average around $55/barrel in the long run, profits are likely to be driven by newer business.
- The company expects its underlying EBIDA to increase at a CAGR of 5-6% with a 4-percentage-point improvement in ROACE (return on average capital employed) in the next couple of years.
- Hydrocarbon, convenience & mobility, and low carbon electricity businesses are expected to generate ROACE of 13%, 17%, and 9%, respectively, by 2030.
The dilemma between capital expenses and shareholder returns
As the company increasingly allocates capital to new segments, cash shortfall for share buybacks is the major concern for investors. The share of capital expenditure towards low carbon electricity and mobility segments is intended to increase from 15% in 2019 to a good 40% by 2030. Per recent filings, newer businesses and conventional hydrocarbons will attract an annual investment of $5-7 billion and $9 billion, respectively.
In 2019, the company generated $25 billion of operating cash, spent $15 billion on property, plant & equipment, paid $7 billion in dividends, and repurchased $1.5 billion of common stock. According to the new strategic footprint, the company plans to spend 60% of its surplus cash in repurchasing shares after paying dividends and capital expenses. Therefore, the share of capital allocation towards property, plant & equipment and dividends is the key ratio to watch for stock price appreciation in the coming years. We expect to have more clarity early next month once the company reports its earnings for full-year 2021.
BP stock has the potential for strong returns in the long run, but with the company being at such an early stage in its new strategic plan, there is likely to be considerable uncertainty around the stock in the near term. If you are looking for a more balanced portfolio, here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.