Down 7% This Year, What’s Next For BP Stock?

With the stock down 7% so far this year, at the current price of around $32 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 (used as a proxy for net profit) was up 4% year-over-year (y-o-y) to $2.8 billion in Q2 2024. Its Q2 revenue declined 3% y-o-y to $47 billion, mainly due to lower product and crude prices, and its adjusted EPADS (Earnings per American Depository Share) grew 12% y-o-y to $1.00. BP has disclosed plans to implement an additional $3.5 billion share buyback program for the second half of 2024, supplementing its initial $3.5 billion commitment for the first half of the fiscal year. This incremental program represents approximately 3.5% of the company’s current market capitalization, potentially providing support to the stock price. The company has also reaffirmed its intention to repurchase shares worth at least $14 billion by 2025, potentially yielding further benefits for shareholders. Concurrently, the company declared a quarterly dividend of $0.48 per ADS, marking a 10% increase from the previous dividend payout.

BP reduced its net debt by $1.4 billion (from Q1 2024) to $22.6 billion, largely driven by strong operating cash flows (up 30% y-o-y to $8.1 billion). Its debt level was $23.7 billion at the end of Q2 2023 (a year ago level). It is worth mentioning that OPEC+ has decided to extend cutbacks on oil production through 2025 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. BP also expects its EBITDA to grow across oil and gas, and refining – underpinning the delivery of its 2025 target of $46 billion to $49 billion.

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 36% in 2021, 39% in 2022, and 6% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it 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 around rate cuts and multiple wars, 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 – and continues to expect the phasing to be split broadly evenly between the first half and the second half. BP continues to expect divestment and other proceeds of $2-3 billion in 2024, weighted toward the second half. BP also continues to expect to reach $25 billion of divestment and other proceeds between the second half of 2020 and 2025.

We forecast BP revenues to be $212 billion for the fiscal year 2024, up marginally y-o-y. Looking at the bottom line, we now forecast earnings per share to come in at $4.26. Given our revenues and EPS forecast changes, we have revised BP Valuation to $41 per share, based on a $4.26 expected EPS and a 9.6x 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 29% 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. Initially, the company demonstrated leadership in the energy sector by pledging to achieve net-zero emissions by 2050 or earlier. However, in a revised commitment, the organization has now set a target to reduce its overall emissions by 35% to 40% by the end of the current decade. This adjustment reflects a recalibration of the company’s climate strategy, acknowledging the necessity to continue investing in oil and gas operations to meet ongoing demand.

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.

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.

While investors have their fingers crossed for a soft landing for the U.S. economy, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 9/26/2024
[2] Cumulative total returns since the end of 2016