SHEL - BP: Refueling The Cash Engine (Rating Upgrade)
2024-04-09 06:25:44 ET
Summary
- Following the ousting of longtime CEO Looney, BP has shifted its energy transition strategy to a more "pragmatic" approach with a renewed focus on Oil & Gas and shareholder distributions.
- Total production to be kept stable at ~2.3Mboed through 2025 with 3% annual growth in liquids through 2027 offering near-term upside as crude price outlook remains strong.
- With surplus cash payout raised to 80%, I see BP offering up to 12% total yield in dividends+buybacks for 2024 and an ~11% annualized yield through 2028 (peers ~9%).
- Lacking portfolio depth post Rosneft-exit at just 8.7 years R/P and a lower margin downstream business remain risks, but I estimate those to be priced in at ~45% discount to peers' 25E EV/EBITDA.
- With BP offering what I see as the best current risk/reward profile in the industry, I move shares to Overweight with an initial price target of $60 (~54% upside).
I recently published my first research on British Oil & Gas Supermajor BP p.l.c. ( BP ) in which I offered a deep dive into its US upstream subsidiary bpx. Given the asset's disadvantage to key US E&P peers in terms of reserve makeup and cost competitiveness, I initiated BP at Underweight. Since then, shares have underperformed its US and EU Supermajor peers, delivering ~6% total returns, around half of the low to mid-double digits achieved by peers ex-CVX where I estimate the legal dispute regarding the Hess acquisition to have created a significant overhang. Notably, E&Ps have outperformed all of the supermajors with US onshore unconventional producers (bpx' main peer group) able to highly capitalize on the recent rise in oil prices, indicating BP's comparably weaker position as outlined in my first note.