BP Stock Flat This Year, What Now?

With the stock flat so far this year, at the current price of around $35 per share, we believe BP plc stock (NYSE: BP), a European integrated energy major, could go higher in the long term. BP’s underlying replacement cost (RC) profit was down by almost half in Q1 2024, to $2.72 billion from $4.96 billion from the year-ago quarter. Lower commodity market prices, a prolonged outage at its Whiting refinery in Indiana, and significantly weakened fuel margins led to this decline. The company’s Q1 hydrocarbon production rose 8% year-over-year (y-o-y) to 1.46 million barrels of oil equivalent (boe)/day, while gas and low-carbon energy output fell 6% y-o-y to 914K boe/day. Its Q1 revenue declined 13% y-o-y to $49 billion, mainly due to lower product and crude prices, and its adjusted EPADS (Earnings per American Depository Share) fell 41% y-o-y to 97 cents. Despite reporting weak Q1 profits, the company announced a $1.75 billion share buyback for the first quarter as a part of its $3.5 billion commitment for the first half of FY 2024. This is 3.5% of the stock’s current market capitalization, which could support its price this year. By 2025, it plans to buy back shares worth at least $14 billion, potentially helping the stock even more.

BP’s net debt grew to $24 billion from $21 billion at the end of Q1 2023, and cash flow fell by roughly a third to just over $5 billion. The company mentioned that its results were affected by a $2.4 billion build in working capital, most of which should likely be reversed by the end of Q3 2024. It is worth mentioning that OPEC+ has decided to extend cutbacks on oil production through the first half of 2024 to support prices by warding off a surplus. Given the weaker global demand, and going by the expected slowdown in the U.S. economy and China’s weaker-than-expected post-pandemic recovery, the cutback on production will likely persist. The company plans to cut at least $2 billion in costs across the business  ~10% of its controllable costs – by the end of 2026 from 2023 levels.

BP stock has seen extremely strong gains of 75% from levels of $20 in early January 2021 to around $35 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. BP is one of a handful of stocks that have increased their value in each of the last 3 years, but that still wasn’t enough for it to consistently beat the market. Returns for the stock were 30% in 2021, 31% in 2022, and 1% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that BP underperformed the S&P in 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Energy sector including XOM, CVX, and COP, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could BP face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

For the full year 2024, BP expects both reported and underlying upstream production to be slightly higher compared with 2023. Within this, BP expects underlying production from oil production & operations to be higher and production from gas & low-carbon energy to be lower. It also expects capital expenditure, including inorganic capital expenditure, to be around $16 billion in 2024.

We forecast BP revenues to be $218 billion for the fiscal year 2024, up 4% y-o-y. Looking at the bottom line, we now forecast earnings per share to come in at $4.54. Given our revenues and EPS forecast changes, we have revised BP Valuation to $41 per share, based on a $4.54 expected EPS and a 9.0x P/E multiple for the fiscal year 2024. That said, the company’s stock appears cheap at the current levels, with our valuation at a 15% premium from the current market price.

Beyond oil and gas production, BP also invests heavily in charging stations, biofuels, hydrogen fuels, and fueling stations. As of 2023, more than 30% of its total spending was allocated to these businesses, up from 3% in 2019. It also set a goal to be a net-zero company by 2050 or earlier. Hydrogen is an integral part of the company’s strategy, and it plans to capture 10% of the hydrogen market in its core business areas. Consequently, it pushes for hydrogen projects across the U.K., Europe, the U.S., and Australia. As a whole, the European oil major has invested more in non-hydrocarbon energy than other U.S. oil majors have. BP acquired Archaea Energy (a renewable natural gas production company based in the U.S.) in late 2022 to expand its bioenergy business. The company also agreed to acquire TravelCenters of America, a leading travel center operator, in early 2023. As part of its heavy investment in renewable energy, BP hopes to build 20 gigawatts (GW) of renewable energy capacity by 2025 and 50 GW by 2030. Currently, it has a joint venture with Equinor to build offshore wind energy facilities in the U.S. The company has said that it plans to transform BP into a clean energy player, in contrast to European rival Shell, which has outlined plans to reduce its investments in renewables.

It is helpful to see how its peers stack up. Check out how BP’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 6/21/2024
[2] Cumulative total returns since the end of 2016