BP Plc (BP)

BP PLC (BP) is a British integrated oil and gas company, headquartered in London, United Kingdom. The company delivers energy products and services to people around the world and has a diverse portfolio across businesses, resource types and geographies. It is a vertically integrated company, engaged in activities ranging from exploration and production of oil and natural gas to marketing chemicals and generating solar energy. The company’s operations are differentiated in three segments: Upstream, Downstream and Rosneft. It has a primary listing on the London Stock Exchange with secondary listings on the Frankfurt Stock Exchange and the New York Stock Exchange. It is a constituent of the FTSE 100 index.

Key Financial Metrics (FY 2018, $m)7


Financial Highlights (FY 2018, $ Mn)
Driven by an increase in upstream and downstream segment business across the USA & Non-US, the company total revenue surged by 24.37% to $298,756 million. The underlying replacement cost (RC) profit was $12,723 million, compared with $6,166 million in 2017, while replacement cost (RC) profit was $9,986 million for the full year, compared with $2,761 million a year ago. The group’s profit for the period was $9,383 million, against $3,389 million in 2017, while it announced a quarterly dividend of 10.25 cents. The net debt at the end of the year stood at $44.1 billion, against $37.8 billion in 2017. Net debt-equity ratio was 30.3%, as compared with 27.4% a year ago. In 2018, the return on average capital employed was 11.2% (2017: 5.8%).

Valuation Methodology


Share Price Commentary


Daily Chart as at Mar-26-19, before the market close (Source: Thomson Reuters) 
On 26th March 2019, at the time of writing (before market close, GMT 8:55 am), BP shares were trading at GBX 551.098, up by 0.52 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 603.60/GBX 465.85. The outstanding market capitalisation was around £111.07 billion and a dividend yield of 5.68%.

Conclusion
The company has both upstream and downstream businesses, supported by well-established trading capabilities. This, along with its wide geographic reach, helps it to cushion the impact of lower commodity pricing cycles and gives access to growing markets and new resources. The company is also well diversified to mitigate the impact of geopolitical events. Based on strong prospects and diversified business, and supported by valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 548.20 (as on 25th March 2019) with single-digit upside potential based on 13.9x NTM Price/Earnings Value (approx.) on FY19E earnings per share.

Gulf Keystone Petroleum (GKP)

Gulf Keystone Petroleum Ltd (GKP) is a holding company, which operates in the Kurdistan Region of Iraq and is engaged in oil and gas exploration and production. It operates one of today’s largest onshore developments, the Shaikan oil field, which has a current production capacity of 40,000 barrels of oil per day and the company plans to increase it to 55,000 barrels per day. The company is based in Hamilton, Bermuda and is listed on the London Stock Exchange.

Recent Development
On 19th March 2019, the company confirmed that a gross payment of $15.0 million, net payment of $11.7 million, had been received from Kurdish Regional Government for Shaikan crude oil sales during December 2018.

Key Financial Metrics (1H FY 2018, $m)


Financial Highlights (1H FY 2018)
Average gross production in the first half of 2018 was 31,861 bopd, which was at the top end of the company’s full-year guidance for 2018 of 27,000-32,000 bopd, driving the growth in revenue which increased to $116.2 million from $78.3 million reported last year. The group reported record profit after tax of $26.7 million. Net cash inflow from operating activities was $61.2 million and cash balance stood at $219 million as on 30^th June 2018.

Share Price Commentary
 
Daily Chart as at Mar-26-19, before the market close (Source: Thomson Reuters) 

On 26th March 2019, at the time of writing (before market close, GMT 10:45 am), GKP shares were trading at GBX 261.5, up by 2.75 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 303.50/GBX 128. The outstanding market capitalisation was around £583.90 million.

Conclusion
The region where the company operates has a history of political and social instability, which represents a major risk to the company. Uncertainty also arises from a risk of changes in leadership, which might affect availability and accessibility of infrastructure allowing the Group to sell oil to export markets. This might affect profitability. Also, the group is highly exposed to oil prices volatility globally; any unfavourable turn may adversely affect the Group’s cash flows and asset valuations. Keeping in mind the risks faced by the group, we have given a watch stance on the stock ahead of its result due to be released on 28^th March.
 

Genel Energy (GENL)

Genel Energy PLC (GENL) is engaged in oil and gas exploration and production in the Kurdistan Region of Iraq, where the company is the largest holder of reserves and resources. The company is listed on the London Stock Exchange and is one of the largest independent oil producers on the exchange. The company has interests in approximately two producing fields, Taq Taq and Tawke, which are its low-cost assets, and had an average net production of 37,000 barrels per day in 2018. The company’s operations are differentiated in three operating segments: Oil, Miran/Bina Bawi and Exploration.

Key Financial Metrics (FY 2018, $m)


Financial Highlights (FY 2018)
The company’s revenue reported an impressive increase from $228.9 million in 2017 to $355.1 million in 2018, driven by an improved average oil price average of $71/bbl and a full year of benefit from the RSA. Due to disciplined and value-focused capital allocation, free cash flow grew by 66% to $164.2 million from $99.1 million in 2017. Total debt remained stable at $300 million, while net cash at year-end increased to $37 million, reflecting a significant increase in cash in 2018. Though no dividend was paid in 2018, the company intends to pay a dividend in 2020 relating to the 2019 financial year.

Valuation Methodology


Share Price Commentary
 
Daily Chart as at Mar-26-19, before the market close (Source: Thomson Reuters) 

On 26th March 2019, at the time of writing (before market close, GMT 10:45 am), GENL shares were trading at GBX 207.00, up by 1.22 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 302/GBX 151.2. The outstanding market capitalisation was around £571.05 million.

Conclusion
The company’s financial and operational performance is heavily dependent on the market price of crude as the revenues are calculated from Dated Brent oil price; a $5/bbl change in the price would result in a change of circa $24 million in profit before tax. Although the company’s interest is fixed on existing debt, any increase in interest rate will make it more expensive for the company to borrow new debt or refinance the existing debt. Moreover, the present value of future cash flows from projects will also decline which will impact the value of its assets. The regions in which the company operates has a history of political and social instability, a deterioration of the relationship between the group and neighbours will impact the monetisation of oil and gas assets. Keeping in mind the risks faced by the company and the valuation done above, we recommend investors to keep a watch on this stock at current levels.

*All forecasted figures and Peer selection have been taken from the Thomson Reuter.

*The buy recommendation is valid for the current price as covered in the report (as on Mar-26-19).

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