Flat Since The Beginning of 2023, Where is BP Stock Headed?

After almost being flat since the beginning of this year, at the current price of around $35 per share, we believe BP plc stock (NYSE: BP), a European integrated energy major, could go higher in the long term. BP stock has increased only 1% year-to-date (YTD), compared to a 19% growth in the S&P index. BP reported weaker-than-expected profits of $3.3 billion (down 60% year-over-year) for Q3 after a large drop in energy prices from a year ago. The company extended its $1.5 billion share repurchase program while maintaining a dividend payout of 7.27 cents/share – helped by a surplus cash flow of $3.1 billion. The company’s Q3 revenue declined 7% y-o-y to $54 billion and its adjusted EPADS (Earnings per American Depository Share) came in at $1.15. Higher earnings from the company’s oil segment were partially offset by lower profits from its gas business.

OPEC+ has cut supplies this year led by Saudi Arabia and Russia. Still, oil prices have been trending downward despite their production reductions, as fears of worsening economic conditions and slowing demand have kept oil prices weak so far. OPEC+ is scheduled to have another meeting in the coming days, and any announcements regarding an extension or deepening of output cuts could act as a catalyst for supporting crude oil prices going forward. Also, the top oil importer, China, is expected to report its PMI (Purchasing Manufacturing Index that provides an early indication each month of economic activities in the Chinese manufacturing sector) this week. Any positive news here could also likely lead to improved fuel prices.

BP stock has seen extremely strong gains of 75% from levels of $20 in early January 2021 to around $35 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. BP is one of a handful of stocks that have increased their value in each of the last 3 years, but that still wasn’t enough for it to consistently beat the market. Returns for the stock were 30% in 2021, 31% in 2022, and 1% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 (YTD) – indicating that BP underperformed the S&P in 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Energy sector including XOM, CVX, and COP, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could BP face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

We forecast BP Revenues to be $219.1 billion for the fiscal year 2023, down 9% y-o-y. Looking at the bottom line, we now forecast earnings per share to come in at $5.06. Given our revenues and EPS forecast changes, we have revised BP Valuation to $40 per share, based on a $5.06 expected EPS and an 8.0x P/E multiple for the fiscal year 2023. That said, the company’s stock appears cheap at the current levels, with our valuation at a 13% premium from the current market price. At current levels, BP trades at a lower valuation than its peers, at under 5x forward earnings.

For the fourth quarter, BP expects its reported upstream production to be broadly flat compared to third-quarter 2023. For the full year 2023, the company expects both reported and underlying upstream production to be higher compared with 2022. It also expects capital expenditure, including inorganic capital expenditure, to be around $16 billion in 2023. BP also continues to expect to be able to deliver share buybacks of around $4.0 billion per annum and have the capacity for an annual increase in the dividend per ordinary share of around 4%. BP has increased its 2030 adjusted EBITDA aims for resilient hydrocarbons by $2 billion to a range of $41-44 billion.

Beyond oil and gas production, BP also invests heavily in charging stations, biofuels, hydrogen fuels, and fueling stations. As of 2022, 30% of its total spending was allocated to these businesses, up from 3% in 2019. It also set a goal to be a net-zero company by 2050 or earlier. Hydrogen is an integral part of the company’s strategy, and it plans to capture 10% of the hydrogen market in its core business areas. Consequently, it is pushing for hydrogen projects across the U.K., Europe, the U.S., and Australia. As a whole, the European oil major has invested more in non-hydrocarbon energy than other U.S. oil majors have. BP acquired Archaea Energy (a renewable natural gas production company based in the U.S.) in late 2022 to expand its bioenergy business. The company also agreed to acquire TravelCenters of America, a leading travel center operator, earlier in 2023. As part of its heavy investment in renewable energy, BP hopes to build 20 gigawatts (GW) of renewable energy capacity by 2025 and 50 GW by 2030. Currently, it has a joint venture with Equinor to build offshore wind energy facilities in the U.S.

It is helpful to see how its peers stack up. Check out how BP’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Month-to-date and year-to-date as of 11/24/2023
[2] Cumulative total returns since the end of 2016