BP Undervalued After Profit Rise, say Analysts

Shares in FTSE 100 oil firm BP rose today after a doubling of quarterly profits amid higher production and crude oil prices

Allen Good 30 October, 2018 | 2:55PM
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BP Oil Prices

Shares in FTSE 100 oil giant BP (BP.) rose today after it reported a doubling in quarterly profit from a year ago as higher production combined with elevated global crude prices.

Morningstar analysts believe the company's shares are currently undervalued and hold a fair value estimate of 670p, above a current price of around 555p. 

Capital spending is running below last year’s levels as management has cited continued cost deflation despite the increase in oil prices. Guidance for full-year spending of $15 billion with spending of $15 billion-$17 billion in the next couple of years is unchanged. We continue to expect growing free cash flow in future years as capital spending holds around current levels and cash flow generation increases with production growth and margin expansion.

The strong cash flow generation over the last year has prompted management to complete the previously announced BHP acquisition with cash as opposed to issuing equity for half of the $10.5 billion purchase price.

Upstream Outperforms

The increase in earnings was concentrated in the upstream segment, which involves oil and gas exploration and production, as earnings rose to $4.0 billion from $1.6 billion a year ago thanks to the higher prices. Production volumes remained flat at 2.5 million barrels of oil equivalent per day, but excluding the effects of production sharing and divestments increased nearly 7% due to new project

BP holds a strong set of projects currently under development, which we expect should deliver average growth of about 5% during the next five years. Higher prices also translated into higher Rosneft earnings of $872 million compared with $137 million a year ago.

Downstream earnings remained strong but slipped slightly to $2.1 billion from $2.3 billion last year amid weakness in refining product margins and turnaround activity. Earnings are likely to weaken further in the fourth quarter as margins weaken seasonally and the Whiting refinery undergoes a major turnaround. Long term, BP’s downstream segment remains well positioned with high-quality refining asset based and marketing earnings growth opportunities.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BP PLC398.00 GBX1.08Rating

About Author

Allen Good  Allen Good is a senior stock analyst covering the oil and gas industries.