BP Still Undervalued, say Analysts

Morningstar analysts leave fair value estimate for FTSE 100 oil giant unchanged after a fall in upstream and downstream profits due to weaker oil prices

Allen Good 30 April, 2019 | 2:19PM
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BP’s (BP.) first-quarter earnings largely met Morningstar analyst expectations while key guidance items remain unchanged. As a result, our fair value estimate of 670p remains unchanged, above the current price of 560p. Profits fell to $2.4 billion from $2.6 billion a year ago. Upstream profits fell to $2.9 billion from $3.2 billion last year on lower oil prices and turnaround activity in the Gulf of Mexico offset by strong gas marketing and trading.

BP retains a four-star rating from Morningstar, meaning that is currently below its fair value estimate.

Production volumes increased 2% from last year, but underlying production – adjusted acquisitions and entitlement impacts – fell 1.9% due to the aforementioned turnarounds and severe weather impacts on the Lower 48 unconventional business, BPX. Growth should remain relatively weak in the second quarter as a result of ongoing seasonal maintenance. Long term, however, the contribution of BP's major projects in ramp-up phase and under construction should drive volumes higher, delivering a 5% compound annual growth rate through 2021.

Downstream profits fell to $1.7 billion from $1.8 billion last year. In the fuels business, weak refining results due largely to narrower crude differentials were offset by growth in fuels marketing earnings from continued expansion in new markets. Lubricants earnings fell but were largely offset by improved petrochemical results. Rosneft earnings increased to $567 million from $247 million last year as foreign-exchange effects were partially offset by lower oil prices.

Operating cash flow excluding Gulf of Mexico payments increased to $5.9 billion from $5.4 billion the year before. Share repurchases during the quarter were minimal, but BP reiterated its intention to repurchase shares issued as part of scrip dividend since the third quarter of 2017 by year-end, which would imply about $1.5 billion. Gearing also remains relatively high at 30.4%. However, cash flow generation should improve through the remainder of the year – higher oil prices, improved downstream results – while asset sales should accelerate as well.

As such, we expect BP to have ample funds to execute its repurchase plan and reduce leverage.

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