BP PLC

BP PLC is an FTSE 100-listed multinational oil & gas company, engaged in the global energy business with operations in Europe, North and South America, Australasia, Asia, and Africa. Moreover, the Company has several brands such as bp, Castrol, Aral, ampm, Amoco, and Wild Bean Café.

On 03 August 2021, BP will announce Q2 FY21 results.

The Company had paid an interim dividend of 5.25 US cents per share on 18 June 2021, while the ex-dividend date was 06 May 2021.

Investment Rationale for Valuation – Hold at GBX 327.85

• The Company had managed to reach the net debt target of less than USD 35 billion during Q1 FY21 and remained committed to maintaining a strong investment-grade credit rating.
• On the profitability front, the Company had reported a Q1 FY21 profit of USD 4.70 billion as compared to USD 1.4 billion during Q4 FY20.
• The solid oil demand had boosted the WTI Crude and Brent Crude price as it had touched new highs recently.
• Driven by the cash surplus made during Q1 FY21, the Company announced a share buyback programme of around USD 500 million.
• BP remained on track to achieve long-term disposal & other proceeds target of USD 25 billion by FY25.
• From a technical standpoint, the 20-days exponential moving average (GBX 321.63) supports the upside potential in the stock price.

Key Risks

• The reported production during F21 would remain lower due to the adverse impact of the ongoing divestment program.
• The top-line business of BP might get impacted by oil & gas price fluctuations, exchange rate fluctuation and a general macroeconomic outlook.
• The unfavourable climate change could adversely affect the operations and might increase the cost.

Q1 FY21 Financial & Operational Highlights (for three months ended 31 March 2021, as of 27 April 2021)

(Source: Company Result)

• The Company had managed to reduce the net debt from USD 38.94 billion during Q4 FY20 to USD 33.31 billion for Q1 FY21.
• The divestment & other proceeds remained USD 4.80 billion for Q1 FY21.
• BP had generated USD 6.10 billion from operating cash flow during the period.
• The Company had witnessed a positive turnaround in profitability during the period.

One Year Share Price Chart

 (Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative) 

Conclusion

The Company intends to distribute 60% of surplus cash flow for 2021 through share buybacks. Moreover, it would use the remaining 40% towards the strengthening of the balance sheet. BP expected the US gas market to benefit from the lower oil production and substantial recovery in LNG demand driven by Asian oil markets. Meanwhile, OPEC+ behaviour will play a key role in oil prices and market rebalancing. The stock made a 52-week low and high of GBX 188.52 and GBX 336.95, respectively.

Based on the recent surge in oil price, cash surplus, consistent dividend payments and support from the valuation as done using the above method, we have given a “Hold” recommendation on BP PLC at the current market price of GBX 327.85 (as on 25 June 2021 at 09:17 AM GMT), while we will revisit our stance after the complete reopening of the UK economy.  

Fresnillo PLC

Fresnillo PLC (LON: FRES) is an FTSE-100 listed world’s leading silver producer and Mexico’s largest gold producer. The Company is engaged in mining and beneficiating non-ferrous minerals like silver, gold, lead and zinc.

FRES will pay a final dividend of 23.5 US cents per share on 30 June 2021, while the ex-dividend date was 22 April 2021.

Investment Rationale for Valuation – Buy at GBX 803.60

• Driven by higher commodity price and lower costs, the Company had achieved around a 15% rise in the total adjusted revenue during FY20. Moreover, the gross profit surged by more than 90% during the period.
• The Company had shown strong growth of approximately 15.9% in gold production during Q1 FY21 as compared to an equivalent period of FY20.
• FRES had raised a new debt with an annual interest rate lower than the original bond set to expire in 2023.
• The recently completed Pyrites Flotation Plant at Fresnillo mine will increase the production levels once it gets operational. 
• From a technical standpoint, a 14-day RSI of ~35.22 is inching towards the oversold zone, indicating an upside potential in the stock price.

Key Risks

• The lack of sufficient water resources to meet water consumption demands could act as an operation headwind for FRES.
• The extreme heatwaves could create several operational headwinds and adversely impact the operations of several mines.
• The gold reproduction would be expected to witness a reduction during FY21 because of reduced activity at Noche Buena and slightly lower volumes at Herradura.
  

AGM Statement (as of 24 June 2021)

• The exploration team would continue to identify development opportunities as FRES expected to initiate the next open-pit gold mine at Rodeo.
• The Company had raised new debt of USD 850 million due to mature in 2050.
• FRES remained optimistic regarding the outlook boosted by the pipeline of new mines and projects.

Q1 FY21 Production Highlights (for the three months ended 31 March 2021, as of 28 April 2021)

(Source: Company result)

• The total silver production remained around 2.4% lower during Q1 FY21 when compared with Q4 FY20.
• Moreover, the gold production rose by around 5.9% during Q1 FY21 on a quarterly basis and by 15.9% on a year-on-year basis.
• The lead and zinc production increased by around 10.3% and 14.2%, respectively, during the period when compared with an equivalent period of the prior year.

One Year Share Price Chart

 (Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The construction of the new Juanicipio mine had progressed well remained on track to become operational by Q4 FY21. With regards to the production guidance, FRES expects gold production to be ranging from 675 koz (“kilo ounces”) to 725 koz and silver production to be ranging from 53.5 moz (“million ounces”) to 59.5 moz during FY21. The silver production would be benefitted from the rising production at Juanicipio. In a nutshell, the Company had managed to stabilise the production levels with a series of improvement programmes in 2021. The stock made a 52-week low and high of GBX 782.40 and GBX 1,379.50, respectively. 

Based on the strong FY20 financial performance, strong liquidity profile, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Fresnillo PLC at the current market price of GBX 803.60 (as on 25 June 2021 at 08:16 AM GMT), with lower double-digit upside potential based on 16.64x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Helium One Global Ltd

Helium One Global Ltd (LON: HE1) is a UK-based company engaged in the exploration and development of helium gas resources. The Company is a constituent of the FTSE AIM All-Share index.

Investment Rationale for Valuation – Expensive at GBX 24.88

• The Company is still in the development phase riding on two major exploration projects: Rukwa Project and Eyasi Project.
• The Company had not reported any revenue during H1 FY21 and widened the net loss during H1 FY21 as compared to H1 FY20.
• The stock is trading near the 52-week high of GBX 25.20, which could raise doubts regarding the upside potential.
• From a technical standpoint, a 14-day RSI of ~70.05 is reflecting an overbought zone and indicating a correction in the stock price.

Key Risks

• The Company may suffer a shortage of fund for the exploration projects.
• The adverse climatic conditions may hamper the progress of exploration activities.
• Any political turbulence may result in the delay of production activities.

Recent Developments

Commencement of Drilling: On 14 June 2021, HE1 updated that it had commenced the exploration drilling programme at the Rukwa Project (100%) in Tanzania.

Award of Drilling EIA Certificate: On 13 May 2021, HE1 had received an Environmental Impact Assessment (EIA) related award for the exploration drilling programme at Rukwa Project in Tanzania.

Financial Highlights (for six months ended 31 December 2020, as of 29 March 2021)

(Source: Company Result)

• The Company had reported a net loss of negative USD 3.89 million during H1 FY21, while it was negative USD 1.59 million for H1 FY20.
• The impairment charge of USD 2.28 million to the merger with Attis Oil & Gas Limited had widened the net loss.
• HE1 had a net cash balance of USD 6.58 million as of 31 December 2020.

Share Price Chart (since 04 December 2020)

 (Analysis done by Kalkine Group)

Conclusion

The Company had raised approximately £10 million to accelerate the progress of the development programme on the Rukwa project in Tanzania in April 2021. Moreover, HE1 delivered exploration time within budget and on time. It would continue to monitor the outbreak of the Covid-19 pandemic as it had created several operational headwinds that resulted in business disruptions. The stock made a 52-week low and high of GBX 2.84 and GBX 25.10, respectively.

Considering the negligible top-line business, overstretched valuations, and weak profitability levels, we have given an “Expensive” recommendation on Helium One Global Ltd at the current market price of GBX 24.88 (as of 25 June 2021 at 09:58 AM GMT), while we will suggest reinvesting once we find fresh growth catalysts for HE1.

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from REFINITIV.

*The dividend yield is subject to change as per the stock price movement.

Disclaimer

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