Business Overview
United Kingdom-based BP PLC (LON: BP) is into the international energy business. The company has a diverse portfolio across businesses, resource types and geographies, and operations across 78 countries worldwide. It has operations in Africa, Asia, Australasia, North & South America and Europe and is one of the six supermajor oil groups in the world. The group was established as Anglo-Persian Oil Company in 1909 with the aim of exploring and producing oil in Persia, and was renamed as the British Petroleum Company in 1954. The group, through a series of risky ventures and acquisitions, has become one of the biggest names in the energy market, delivering energy products and services to people around the world. The group was listed on the London Stock Exchange in 1954 and is currently a constituent of the FTSE 100 index.

On 20^th December 2019, the company will pay the third-quarter dividend to the shareholder. The ex-dividend date for the 8% and 9% preference shares will be 2^nd January 2020, with a payment date on 31^st January 2020. The group will also announce the fourth-quarter results and dividend on 4^th February 2020.

Key Statistics



Management

Helge Lund is the Chairman of the group; he was appointed on 1 January 2019 and had an impressive track record of leadership in the oil and gas industry. Bob Dudley holds the responsibilities of Chief Executive Officer of the group since October 2010. Brian Gilvary is the current Chief Financial Officer (CFO) since 1 January 2012.

Business Model


(Source: Company Website)

The business process is divided into six systematic ways: finding oil and gas, developing and extracting oil and gas, transporting and trading, manufacturing and marketing fuels and products, generating renewable energy, and venturing. BP is a vertically integrated group with operations in all areas of the oil and gas industry, ranging from upstream, downstream and renewables businesses to manufacturing and marketing fuels and raw materials. The group successfully mitigates exposure to geopolitical events by diversifying across geographical regions, giving it access to growing markets and new resources, and the impact of commodity pricing cycles is cushioned with the help of well-established trading capabilities and a diverse portfolio. By developing and using technology to reduce costs and risks, the group is able to competitively explore new resources, with customers ranging from independent power producers to utilities and municipalities. The group also has renewable energy interests in solar technology, wind power and biofuels, and is the largest trader of natural gas in North America.

Top Shareholders

 

Key Brands

The company is differentiated into six brands: BP, Castrol, Aral, ampm, Amoco and Wild Bean Cafe. BP is the main brand. Castrol is one of the world’s specialist lubricants and top motor oil brand. Aral is one of the most trusted brands in Germany, with fuel and stations. In the western US, ampm is a convenience shop, with a robust personality. Amoco is a fuel retail brand. Wild Bean Cafe is the high-concept cafe, which provides fresh and affordable food, coffee and meal.

Segments

The operations of the BP PLC are differentiated in four operating segments, namely Upstream, Downstream, Rosneft and Other businesses and corporate. The Upstream segment consists of ?eld development and production activities, oil and natural gas exploration, which help in renewing the resource base of the group. It also includes the marketing and trading, storage and processing, and midstream transportation of natural gas. The Downstream segment is made up of three businesses and is the product and service-led arm of BP, managing global marketing and manufacturing operations, along with trading, supply, transportation and refining of crude oil, petroleum, petrochemicals products and related services. Other businesses and corporate includes corporate activities worldwide, the biofuels and wind businesses, and treasury and shipping functions of the group.

Recent News
On 9^th December 2019, the Directors of the company announced that the interim dividend per ordinary share for the third quarter of 2019 was US$0.1025. This will be paid on 20^th December 2019 to investors on the share registered date on 8^th November 2019.

On 4^th December 2019, the company is in a deal with AWS (Amazon Web Service’s). This deal supplies renewable energy to its European datacentres. With 170 megawatts, the company will commence supplying AWS’s servers of renewable energy each year. It will be started in 2021 and corresponding to the power used by over 125 thousand European homes.

BP and Bunge announced on 2^nd December 2019, the accomplishment of a new joint venture, BP Bunge Bioenergia.

The company announced on 13th November 2019, that Nils Andersen, as a non-executive director of the company, has stepped down and resigned. Melody Meyer is appointed as the Committee's chair with an immediate effect.

Financial Highlights (for the third quarter and nine months ended 30 September 2019, US$ million)


(Source: Third quarter and nine months 2019, Company Website)

Upstream production, which excludes Rosneft, for the third quarter of 2019 averaged 2,568 mboe/day, 4.4% higher than a year earlier, while production for the first nine months of 2019 was 2,616 mboe/day, 4.2% higher than 2018. In the third quarter and nine months of 2019, the underlying production decreased by 2.5% and 1%, respectively, driven by an increase in the maintenance activities and seasonal turnaround, and weather effects, resulting from Hurricane Barry in the US Gulf of Mexico. The total sales and other operating revenues decreased from $223,079 million in 9M 2018 to $207,288 million in the current period and $68,291 million in Q3 2019 from $79,468 million in the third quarter of 2018. This reflected in a fall in total revenues and other income stood at $210,446 million in the latest period. Profit before interest and taxation was reported at $10,554 million ascompared to $16,214 million in 9M 2018, while profit before taxation was recorded at $7,905 million. Replacement cost profit before interest and tax for the upstream segment declined to $4,303 million in 9M FY19 from $10,160 million for the same period in 2018 with an increase in the downstream segment to $5,069 million from $4,802 million in 9M 2018. Replacement cost profit was $3,519 million for the nine months of 2019. The basic earnings per share stood at 19.47 cents in the first nine months of 2019. The group announced a dividend of 10.25 cents per ordinary share for nine months of 2019. Excluding Gulf of Mexico oil spill payments, operating cash flow was $6.5 billion for the third quarter and $20.6 billion for the nine months 2019, while net debt at 30 September 2019 was $46.5 billion, compared with $38.5 billion a year ago.

Key Performance Indicators

Reserves Replacement Ratio



In the financial year 2018, reserves replacement ratio, which measures the extent to which proved reserves added to reserve base during the period covers the production, declined to 100 per cent, but was in line with the five-year average reserve’s replacement ratio.

Production



Production is a useful measure for tracking how the company’s major projects are helping to grow the business. The company’s total reported production for the financial year 2018, including Upstream and Rosneft segments, increased to 2.4% as compared with the corresponding period of the last year. The increase was driven by improved plant reliability and major project ramp-ups.

Upstream Unit Production Costs


The upstream unit production cost indicator reflects how headcount, supply chain, and scope optimization impact the cost efficiency. In the financial year 2018, upstream unit production costs rose to $7.15/boe due to the impact of higher prices on production entitlements and increased well-work activity.

Refining Availability


Refining availability is an important indicator of the operational performance of the Downstream business and shows the percentage of the year that a unit is available for processing after various deductions. In 2018, it stood at 94.9%.

Financial Ratios
 

The profitability margins of the group were flat from the previous period but declined as compared to the industry median data. The liquidity ratios have also increased gradually, which might indicate a normalisation of ratios. However, the company’s debt-equity ratio remained flat as compared to the previous year.

Share Price Performance


Daily Chart as at December-18-19, before the market close (Source: Thomson Reuters)

On December 18, 2019, at the time of writing (before the market close, at 10:53 AM GMT), BP PLC shares were trading at GBX 479.20, up by 0.07 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 583.41/GBX 461.15. The average traded volume for 5 days was up by 21.42 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.44, reflecting higher volatility as equated to the benchmark index. The outstanding market capitalisation was around £98.53 billion, with a dividend yield of 6.83 per cent.

Valuation Methodology
Method 1: EV/EBITDA Multiple Approach (NTM)



To compare BP with its peers, EV/EBITDA multiple has been used. The peers are Equinor ASA (NTM EV/EBITDA was 3.02), Eni SpA(NTM EV/EBITDA was 3.80), Chevron Corp (NTM EV/EBITDA was 65.42), Royal Dutch Shell PLC(NTM EV/EBITDA was 5.02), Galp Energia SGPS SA(NTM EV/EBITDA was 5.57) and Exxon Mobil Corp(NTM EV/EBITDA was 6.42). The median of EV/EBITDA (NTM) of the company’s peers was 5.30x (approx.).

Method 2: Price/Earnings Multiple Approach (NTM)



To compare BP with its peers, Price/Earnings multiple has been used. The peers are Equinor ASA (NTM Price/Earnings was 10.68), Eni SpA (NTM Price/Earnings was 11.56), Galp Energia SGPS SA (NTM Price/Earnings was 15.04), Chevron Corp (NTM Price/Earnings was 17.28), Royal Dutch Shell PLC (NTM Price/Earnings was 10.49) and Exxon Mobil Corp (NTM Price/Earnings was 18.66). The mean of Price/Earnings (NTM) of the company’s peers was 13.95x (approx.).

Growth Prospects

The group is well mitigated against any downside risk in any one region or commodity, as the group owns and operates assets in a wide range of commodities across many countries, offering the group a much-needed diversity. Recognising the need to differentiate from its peers, and prepare for the future demand of energy, the group is increasingly making a push towards renewable sources of energy, which ensures sustainable growth in the business. By lowering costs through deploying new technologies and deploying rigorous cost minimising programs, the company seeks to maximise output from its portfolio in an efficient way.

Strategic Initiatives

For an electric vehicle, drivers are currently covering 1.5 million miles a week in the United Kingdom and powered by BP Chargemaster. The company’s scientists have come up with a resolution to plastic waste: a smart technology with the potential to recycle billions of PET (Polyethylene terephthalate) bottles and plastic trays originally destined for incineration or landfill. The company’s Ventures business is placing 11 million US Dollar into MaaS Global company (digital mobility software firm). BP Ventures business has also invested $5 million in forest carbon offset leader Finite Resources, to assist them in developing a new line of business to monetize and promote forest management. Lightsource BP has signed an agreement to fund a 200 MW (megawatt) installation in New South Wales, Australia.

Risk Assessments

The prices of various commodities which the company markets can be subject to significant fluctuations, and as the prices are affected by global supply and demand, the company does not have any influence on the market prices, which can lead to a significant impact on the financials and affect the business assumptions. Also, since the company has operations in diverse regions, adverse exchange rate movements can impact the bottom-line numbers. Demand for products can also be impacted by the decelerating economic growth in China and India, which are a leading importer of energy products. In the short-term, the company expects to face challenges from macroeconomic and geopolitical uncertainties, not least from the continuing global trade tensions, which has impacted the global growth.

Conclusion

In the third quarter of 2019, the company faced with a challenging environment, which impacted the group’s financial performance. During the current period, the net debt remained flat. With the receipt of disposal proceeds and growing free cash flow, the company will continue to deliver decent business performance in the near term.

Further, the underlying effective tax rate for the current quarter was lower than earlier indicated, primarily due to a lower-than-anticipated effect from the Upstream profit mix and higher-than-anticipated Rosneft earnings. The diversity in operations and strong industry connections support the future growth of the company with strong fundamentals. Over the last five years, the revenue of the group has risen by a CAGR of 3%, while gross profit grew by a CAGR of around 5%.

Based on the decent fundamentals and supported by valuation undertaken using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 478.85 (as on 17 December 2019) with lower double-digit upside potential based on 13.95x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.) and 5.30x NTM EV/EBITDA (approx.) on FY19E EBITDA (approx.).
 
 
*The “Buy” recommendation is also valid for the current price as covered in the report (as on 18-December-19).
*All forecasted figures and Peer information have been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.762893 GBP.

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