Historically, BP’s (NYSE: BP) earnings have been primarily dependent on the oil & gas business resulting in fluctuating asset returns, fairly 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 is targeted to stabilize returns in the coming years. As highlighted in our previous article, Invest In BP Stock To Realize Capital Gains, 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. Thus, the stock is a long-term bet for investors banking on renewables, as BP’s low carbon energy and mobility solutions businesses are likely to attract around 40% of the company’s capital budget by 2030. We highlight the key factors driving BP Valuation including revenues, margins, valuation multiple, and competitive comparison with peers in an interactive dashboard analysis.
Below you’ll find our previous coverage of BP stock where you can track our view over time.
In the recent earnings release, BP (NYSE: BP) announced a $1.25 billion share repurchase program given the sizable improvement in cash flows from rising oil prices. The company remains committed toward expanding its renewable energy portfolio and divesting oil & gas assets as opposed to other oil majors. At an average benchmark price of $60 per barrel, the company expects to execute $1 billion of share repurchases every quarter. With the oil & gas industry likely to observe higher capital spend due to the spike in benchmark prices, BP’s capital return policy focuses on sustaining economic returns until the low carbon energy and mobility investments generate returns. After the OPEC slashed production by 9.7 mb/d last year, a slow easing in mandatory curtailments was expected this year. However, energy demand exceeded supply leading to a sharp spike in benchmark prices. Notably, the oil industry retains its volatile nature fostered by bargaining power of suppliers and international policies. Thus, BP stock is a good pick for investors banking on renewables for long-term gains. Trefis highlights the historical trends in revenues, earnings, and stock price in an interactive dashboard analysis on BP Valuation.
[Updated 2021/10/04] – Invest In BP Stock To Realize Capital Gains
Rising oil prices have been a boon for the overall industry including BP (NYSE: BP), which is going through a transition phase and expanding the convenience and renewable energy businesses. In H1 2021, the company generated $11.5 billion of cash from operations, repaid $7 billion of long-term debt – bringing the net debt down to $33 billion. Per the strategic footprint, the company is slated to return 60% of surplus cash as buybacks and announced a $1.4 billion share repurchase program with the second-quarter results. Considering the company’s deleveraging and capital return policy, Trefis believes that the stock is a good pick to realize long-term capital gains. We highlight the key factors driving BP Valuation including revenues, margins, valuation multiple, and competitive comparison with peers in an interactive dashboard analysis.
Deleveraging benefits: taking cues from the airline industry
The steep decline in benchmark oil prices due to the coronavirus crisis has led to the implementation of a deleveraging and capital conservation policy across the oil & gas industry. Declining profitability and an uncertain demand environment are two key reasons for this change. The airline industry has also been facing margin pressure due to growing competition and slow demand growth in recent years. In 2016, Alaska Air Group (NYSE: ALK) implemented a deleveraging policy after acquiring Virgin America and restricted shareholder returns such as dividend payouts and buybacks. Thus, ALK stock has been rewarded by investors and currently trades at just 10% below pre-Covid levels. However, the shares of its competitor American Airlines (NASDAQ: AAL) remain 30% below pre-Covid highs and have followed a downward trajectory since 2018. In the article, What If American Airlines Had Implemented Alaska Air’s Capital Allocation Strategy?, we compare the capital allocation strategy of the two companies and how de-leveraging benefited Alaska Air Group.
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. (Related: Banking On Renewables? Pick BP Stock Over Exxon)
What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.
|S&P 500 Return||-2%||23%||106%|
|Trefis MS Portfolio Return||0%||44%||286%|
 Month-to-date and year-to-date as of 12/20/2021
 Cumulative total returns since 2017