Key Investment Highlights
 

1. BP PLC (LON: BP) has an experience of around 110 years to manage volatility and financial shocks. The Group has been progressing well towards USD 15 billion announced transaction programme by mid-2021, which recently got revived by the disposal of its Alaska business for USD 5.6 billion.

2. BP PLC is proactively embracing change in consumer trends with an extensive portfolio of alternative energy solutions.

3. The CEO, Bernard Looney recently shared his commitment to bring the break-even lower than USD 35 per barrel by 2021.

4. The Company showed resilience in financials of first-quarter despite demand and supply shocks, while it is committed to making balance sheet even stronger by the end of the current fiscal year.

5. The Group continues to invest USD 500 million in low-carbon activities, reflecting its relentless focus toward future demand and market.

6. BP has adopted several cash preservatives, while boosting its finances to weather the near-term uncertain scenario.

7. The Group is progressing well towards achieving 900,000 barrels of oil equivalent per day, by the end of 2021 as they launched 24 among the 35 planned major projects since 2016.

8. The stock price of BP PLC is currently trading near its 52-week low, reflecting a lucrative opportunity to buy this energy stock with high growth potential.

9. The Company’s trading multiples (EV/EBITDA and Price/Book) are trading lower than Oil & Gas Producers industry, reflecting that the Company is trading at a lower multiple as compared to its peers.

10. BP has a history of providing cash dividends since 1993 and offers a diverse range of energy products & services around the world.
 

BP PLC (LON: BP) – Introducing Cost-Saving Program to Battle Current Challenging Scenario Pertinent to Nosedived Demand and Price Volatility

BP PLC is an integrated energy business with major operations in North and South America, Europe, Asia, Australasia, and Africa. It operates with around 79,100 employees in 79 countries. The Group was formed in 1908 after the discovery of oil in Persia. Currently, it has around 18,900 retail sites and approximately 19,341 million barrels of oil equivalent in proved reserves. In addition, the Company also operates in renewable energy with interest in wind power, solar energy, and biofuels. The Company was admitted to the LSE (London Stock Exchange) on 29^th March 1954 and presently, is a constituent of the FTSE 100 index. Further, the Group is split into six brands, namely, Castrol, Amoco, Aral, ampm, BP and Wild Bean Café.

On 28^th July 2020, the Group is expected to announce its second-quarter results for FY20. 


(Source: Annual Report, Company Website)

Key Fundamental Statistics



Segments at a Glance (Financials in USD Million)


The Company splits its business into four major segments as follows:
 

1. Upstream: 

This segment comprises of oil and natural gas exploration, production activities and ?eld development, which is required to renew the resource base. In addition, it involves storage and processing, marketing & trading and midstream transportation of natural gas.

2. Downstream: Responsible for manufacturing and marketing of petrochemicals, lubricants, fuels. In addition, it manages trading and supply function.

3. Rosneft: It comprises both upstream and downstream functions, wherein BP PLC holds 19.75 per cent of stake.

4. Other businesses and corporate: Responsible for corporate and business activities.
 

A Glimpse of Non-Financial KPIs in 2019 vs 2018
 

1. In 2019, recordable injury frequency was reported as 0.166 from 0.198 in FY2018; and the Group is targeting towards zero incidents.

2. The proved reserves ratio stood at 67 per cent in FY2019 as against 100 per cent in FY2018, reflecting a net decrease of reserves due to lower gas and oil prices.
 

(Source: Annual Report, Company Website)

Significant Developments of 2020
 

1. 29^th April 2020: BP PLC announced the correction in first-quarter dividend record date as 11^th May 2020.

2. 27^th April 2020: The Company sold its Alaska business (for the consideration of USD 5.6 billion) to Hilcorp. However, it is expected to complete in June 2020 post regulatory approval.

3. 1^st April 2020: The Company has implemented cost savings of USD 2.5 billion and capital expenditure to be slashed by 25 per cent in FY2020, to weather the prevailing uncertain scenario. 

4. 20^th March 2020:Paula Reynolds will be appointed as the senior independent director, with effect from 27^th May 2020 (post annual general meeting).
 

Top Shareholders Statistics

 
(Source: Refinitiv, Thomson Reuters)

Q1 FY20 Highlights -Underlying Businesses Performed Well


(Source: Quarter Results, Company Website)
 

1. On 28^th April 2020, the Group revealed the first quarter results of the financial year 2020. The underlying businesses performed well, despite the challenging environment. BP’s first-quarter underlying replacement cost profit stood at USD 791 million as compared to USD 2,358 million a year ago and USD 2,567 million in the fourth quarter of 2019.

2. Compared to the fourth quarter, the result reflects a lower estimated Rosneft contribution, lower oil and gas realisations, and a higher effective tax rate. It also includes growing demand destruction in the Downstream.

3. The organic and inorganic capex stood at USD 3.5 billion and USD 0.3 billion, respectively, in the first quarter of 2020,a decrease from the last year comparatives.

4. On March 31, 2020, the net debt surged to USD 51.4 billion.

5. The liquidity position stood at USD 32 billion in the first quarter of the financial year 2020.

6. The Company quarterly dividend of 10.5 cents (per ordinary share), scheduled to be paid on 19^th June 2020. On 29^th April 2020, it has changed its record date of Q1 interim dividend to 11 May 2020 (not 7 May 2020 and 8 May 2020, respectively, as stated in Q1 FY20 results announcement).
 

Financial Highlights for FY19 – Decent Operating Cash Flow Growth and Made Significant Progress Towards the $10 billion Divestment Target


(Source: Annual Report, Company Website)
 

1. During the fiscal year 2019, the Company’s underlying replacement cost (RC) profit was $9,990 millionas compared to $12,723 million in the fiscal year 2018 due to the impact of the weaker environment.

2. The Group’s full-year operating cash flow stood at $28.2 billion. BP’s organic capital expenditure was $15.2 billion for the full year. 

3. The Company has completed its share buyback programme in the month of January 2020, which boosted shareholders confidence. 

4. The company declared a dividend of 41 cents per share for FY19, an increase of 1.23 per cent year on year.

Financial Ratios Metric 
 
 
With an immense volatility as seen lately in the crude oil prices due to covid-19 pandemic chaos, the Group’s profitability margins were impacted in the first quarter. The liquidity ratios remained flat against the previous quarter, which might indicate a normalization of ratios. However, the company’s debt-equity ratio stood marginally higher against last quarter.

Share Price Performance Analysis
 
Daily Chart as on 20th May 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 20th May 2020, at the time of writing (before the market close, at 9:24 AM GMT+1), BP Plc shares were trading at GBX 310.95, down by 1.01 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 565.80 /GBX 222.90.

Bullish Technical Indicator

From the technical standpoint, its shares were trading flat as compared to its short-term support level of 20-day simple moving average price. Momentum oscillator RSI 14 days on the chart is reflecting an oversold position for the stock and upside bump can be triggered in the near term.

Valuation Methodology

Method 1: EV/EBITDA Approach (NTM)
 


To compare BP Plc with its peers, EV/EBITDA multiple has been used. The peers are Repsol SA (NTM EV/EBITDA was 4.83), Eni SpA (NTM EV/EBITDA was 4.86), Royal Dutch Shell Plc (NTM EV/EBITDA was 4.88), Ferrexpo Plc (NTM EV/EBITDA was 3.37), Total SA (NTM EV/EBITDA was 6.12), Galp Energia SGPS SA (NTM EV/EBITDA was 5.64) and Saudi Arabian Oil Co (NTM EV/EBITDA was 12.60). The Average of EV/EBITDA (NTM) of the company’s peers was 6.49x (approx.).

Method 2: Price to Cash Flow Approach (NTM)

 

To compare BP Plc with its industry median, Price/Cash Flow multiple has been used. The industry median Price/Cash Flow (NTM) multiple was 3.40x (approx.).

Valuation Metrics


(Source: London Stock Exchange)

As on 30^th April 2020, the EV to EBITDA multiple of the BP Plc was around 3.60x, which was lower as compared to the industry. It reflects shares of the Company are undervalued against its peers.

Dividend Yield


(Source: Refinitiv, Thomson Reuters)

BP Plc has a dividend yield of 10.5 per cent, which is slightly higher than the industry dividend yield of 10.28 per cent and marginally lower than the sector dividend yield of 11.07 per cent. This needs to be considered in view of the recent correction in the stock price.

BP V/S Industry V/S Sector – 2 years


(Source: Refinitiv, Thomson Reuters)

In the last two years, BP Plc’s share price declined by 46.42 per cent against the industry decline of 51.21 per cent and the sector decline of 51.61 per cent.

BP Total return- 1 Month


(Source: Refinitiv, Thomson Reuters)

In the last month, BP Group Plc has delivered a total return of 6.29 per cent while the FTSE All-share index has delivered a return of 3.89 per cent.

Industry Outlook

As per the report from Allied Market Research, the global renewable energy market is expected to reach around USD 1,512.3 billion by 2025 from USD 928.0 billion in 2017. However, there are various factors which will drive the overall global energy demand such as
 

1. The global population is projected to increase from 1.7 billion in 2019 to 9.2 billion in 2040.

2. The global economy is likely to double in the next 25 years. Hence, the rising energy demand for economic activities.

3. Increasing awareness towards climatic change and carbon emission.
 

(Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

The Group is well mitigated against any downside risk in any one region or commodity, as its owns and operates diversified assets across many countries. Recognising the need to differentiate from its peers, and prepare for the future demand of energy, BP is increasingly making a push towards renewable source of energy, which ensures sustainable growth for the business. In the near term, electric vehicles demand will boost the company’s financial performance. The ongoing outbreak of Coronavirus could impact the company’s performance in the near term. BP is cautious about the outlook for its key commodities in the short term but expects positive demand in the long-term.  In the medium term, the Group expects additional supply would be needed in most of its operational sectors and expects an increase in demand in the upstream and downstream divisions, which would be beneficial for the Group.

Business Outlook Scenario

During the first quarter of the financial year 2020, the company faced a challenging environment, which impacted the group’s financial performance. With the receipt of disposal proceeds and growing free cash flow, the company would continue to deliver decent business performance in the near term. The diversity in operations and robust industry connections support the future growth of the company with strong fundamentals. By lowering costs through deploying new technologies and rigorous cost-minimizing programs, the company seeks to maximize output from its portfolio in an efficient way.

The Group is progressing well towards achieving 900,000 barrels of oil equivalent per day, by the end of 2021 as they launched 24 among the 35 planned major projects since 2016. The company’s total revenue has grown from $185,474 million in FY2016 to $282,423 million in FY2019 (~15.05 per cent growth on a CAGR basis).

In order to mitigate the downside risk in the prevailing scenario, the BP Group has been focused on reducing cost by introducing new technologies and adopting several cost minimising programs. It has been differentiating the services from its peers and preparing for renewable solutions for future demand. Further, the Group has a target of reaching net-zero in terms of carbon emission. The Company is also focusing on evolving technology to cope up with changing policy and consumer trends. It is further simplifying processes and enhancing productivity through digitalization.

Based on the decent growth trajectory and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 306.64 (as on 20th May 2020, before the market close at 8:39 AM GMT+1), with lower-double digit upside potential based on 6.49x EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 3.40x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.). 
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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