The British energy major BP PLC made a headline at the start of 2020, when it unveiled plans to target net zero carbon emission by 2050; however, then in April 2020 the Company came in headline again with plans to slash 15 per cent of its total workforce (roughly 10,000 jobs). Yesterday (11^th June 2020), the Brent crude oil price fell to $37.94 per barrel, down by 9.1 per cent against the previous day close. The plunge was followed by the fresh rise of COVID-19 cases in the US, which topped 2 million on Wednesday (10^th June 2020), proliferating apprehensions regarding the second wave of the pandemic. It is raising apprehensions regarding the demand slump and oversupply concerns to disrupt the market for long.

BP PLC (LON: BP.)– Introducing Cash Saving Programmes to Withstand Price Volatility

BP PLC is a FTSE 100 international energy business based out of the United Kingdom with a diverse portfolio across businesses, resource types and geographies, and operations across 79 countries worldwide.

The Company changed the date for announcing its second quarter FY20 (ending 30^th June 2020) results from 28^th July 2020 to 4^th August 2020.

Recent News
8^th June 2020: The Company announced that the amount of sterling dividend payable in cash, which is scheduled to be paid on 19^th June 2020, will be 8.3421 pence per share.

Trading Update (as on 28^th April 2020)

(Source: Company Website)

In this update, the Company affirmed that 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 in Q1 FY19 and USD 2,567 million in the fourth quarter of 2019. 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. As on 31^st March 2020, the net debt surged to USD 51.4 billion, while the liquidity position stood at USD 32 billion. The dividend announced for the first-quarter 2020 was 10.5 cents per share.

Share Price Performance

Daily Chart as on 12^th June 2020, before the market closed (Source: Refinitiv, Thomson Reuters)

BP’s shares were trading at GBX 316.89 on 12^th June 2020 (before the market close at 7.09 AM GMT+1), which was down 1.24% against the last day closing price. Stock's 52 weeks High is GBX 563.05 and Low is GBX 222.90.

From the technical standpoint, 3 days, 9 days, and 14 days relative strength index of the stock was favourable and price could rise further from the current trading level.

Valuation Methodology

*Peer: Equinor SpA, Eni SpA, Total SA and Galp Energia, SGPS SA
1 USD = 0.795171 GBP
 
Valuation Metrics

(Source: London Stock Exchange)
As on 29^th May 2020, the EV/EBITDA multiple of the BP. Was 3.6x, which was lower as compared with the Oil & Gas Producers industry of 3.7x, reflecting that the Company is trading at a lower multiple as compared to its peers.
 
Growth Catalysts
The Company 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. The Company CEO, Bernard Looney recently shared his commitment to bring the break-even lower than USD 35 per barrel by 2021.

Conclusion
During the fiscal year 2019, the Company’s underlying replacement cost (RC) profit was USD 9,990 million as compared to USD 12,723 million in the fiscal year 2018 due to the impact of the weaker environment. During the first quarter of the financial year 2020, the Company faced a challenging environment, which impacted the Group’s financial performance. However, 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. 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.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation at the current price of GBX 312.65 (as on 12th June 2020, before the market close at 7.02 AM GMT+1) with lower double-digit upside potential based on 4.50x NTM Price/Cash Flow (approx.) on FY20E Cash Flow Per Share (approx.).

 
Royal Dutch Shell PLC - Positive Working Capital Movements, Net-Zero Emissions Energy Business by 2050

Royal Dutch Shell Plc (LON: RDSA) is a FTSE 100 listed petrochemical and energy company, which is involved in the exploring, producing, refining, and marketing of oil and natural gas.

On 30^th July 2020, the Company will announce its second quarter of 2020 results.

Recent News
On 8^th June 2020, the Board of the Group announced the euro and pounds sterling equivalent dividend payments in respect of Q1 FY20 interim dividend, which was released on 30^th April 2020 at USD 0.16 per A ordinary share and B ordinary share.

On 19^th May 2020,the Group has appointed Dick Boer and Martina Hund-Mejean as a Directors of the Company.

First-quarter of 2020 Update (as on 30^th April 2020)
Excluding working capital movements, the cash flow from operations for the first quarter of 2020 was USD 7.4 billion, reflecting lower earnings and higher cost-of-sales adjustment, partially offset by higher cash inflows related to lower tax payments and commodity derivatives, as compared with the same period last year. In Q1 FY20, the free cash flow increased to USD 12.1 billion as compared with the previous quarter (Q4 FY19: USD 5.4 million) and the corresponding period of the last year (Q1 FY19: USD 4 billion). Excluding identified items, the earnings attributable to shareholders stood at USD 2.9 billion in Q1 FY20, and it was impacted by lower price and margin environment. The return on average capital employed (ROACE) was 6.1 per cent, while it was impacted by lower earnings. Cash capital expenditure was stated at USD 5 billion in the first quarter of 2020. The Company is also pausing the share buyback programme.

Share Price Performance

1-Year Chart as at June-12-2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 12^th June 2020, before the market close (at 8:30 AM GMT+1), Royal Dutch Shell PLC’s shares were trading at GBX 1,307.40 and were down by 1.62 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 2,637.50 /GBX 946.10.

From the technical standpoint, 3 days, 9 days, and 14 days relative strength index of the stock was favourable and price could rise further from the current trading level.

Valuation Methodology
 

Valuation Metrics

 (Source: London Stock Exchange)

As on 29^th May 2020 2020, the Price/Earnings, EV/EBITDA, and Price/Book multiples of the RDSA were 7.4x, 3.6x and 0.6x, respectively, which were lower as compared with the Oil & Gas Producers industry of 11.2x, 3.7x and 0.7x, respectively, reflecting that the Company is trading at a lower multiple as compared to its peers.

Growth Catalysts
The Group has signed a farm-in agreement for three offshore exploration blocks in Colombia. It has completed the acquisition of 2 blocks in the Vaca Muerta, Argentina. In Q2 FY20, the production is expected to be 1,750-2,250 thousand boe per day in upstream division. Shell is continuously investing in generating power from natural gas and renewable sources.

Conclusion
The Company witnessed a decline in the financial performance in the Q1 of the financial year 2020. However, with COVID-19 outbreak, there could be macro-economic fluctuations regarding prices and demand for oil, gas and products. Moreover, recent uncertainty in oil supply has caused volatility in commodity markets, which can affect the earnings and profitability of the Company. The group’s Marketing and Integrated Gas businesses have performed well with strong cash flows. Shell is confident that its integrated business model and high-quality assets will help then to overcome uncertain times. Hence, the Group looks attractive and has the capability to sustain for the long term.

Based on the above rationale and supported by valuation done using the above method, we have given a "BUY" recommendation at the current price of GBX 1,305.20 (as on 12^th June 2020, before the market close at 8:05 AM GMT+1) with lower double-digit upside potential based on 7x NTM EV/EBITDA multiple (approx.) on FY20E EBITDA (approx.).
 
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.