2023-10-03 00:24:04 ET
Summary
- BP has experienced challenging conditions in the oil market but has financially stabilized and is now a cash cow.
- The company plans to give back surplus cash flow to shareholders through dividend increases and share buybacks.
- BP shares are undervalued at current oil prices and offer upside potential even at lower oil prices.
- The current shareholder yield (dividends+buybacks) is close to 10% and shares are also undervalued compared to BP's peers.
Introduction
BP ( BP ) is a well-known major oil player from the UK which has faced challenging conditions in a difficult oil market for the last three years. Despite drastic events (Deepwater Horizon, shale oil expansion, COVID, Rosneft write-off), the company remained a cash cow. It did not only survive, BP has celebrated a stunning comeback since 2021 as the company financially stabilized which is reflected in the new dividend and share buyback policy. At current oil prices of over $90 (Brent), BP is literally printing money which will be given back to its shareholders (40% of surplus cash flow) via dividend increases and share buybacks. In the following I will demonstrate that BP shares are strongly undervalued at a current share price of $6.45 (= $38.72 ADR price) by looking at different oil price scenarios. Every BP ADS represents six BP ordinary shares .
Valuation
At the end of the second quarter 2023, BP had 17.38 bn shares outstanding and a total market cap of $112.8 bn as of 09/30/23 (share price of $6.49).
The fundamental ratios can be found in the table below, with a peer comparison*:
Company | Mcap ($) | P/S | P/EBITDA | P/E | P/B | yield (%) |
BP | 112.8 | 0.53 (1.) | 2.28 (1.) | 8.1 (3.) | 1.3 (2.) | 4.5 (2.) |
Shell ( SHEL ) | 214.6 | 0.67 (2.) | 3.02 (2.) | 7.5 (2.) | 1.1 (1.) | 3.3 (4.) |
Chevron ( CVX ) | 321.4 | 1.61 (5.) | 6.18 (4.) | 12.6 (5.) | 2.0 (4.) | 3.6 (3.) |
TotalEnergies ( TTE ) | 159.8 | 0.73 (3.) | 3.20 (3.) | 7.1 (1.) | 1.4 (3.) | 4.7 (1.) |
Exxon ( XOM ) | 470.4 | 1.38 (4.) | 6.27 (5.) | 12.4 (4.) | 2.3 (5.) | 3.1 (5.) |
*sales, EBITDA, earnings, equity and dividend numbers for 2023 in relation to the share prices as of 09/30/23.
BP claims the top spot in two fundamental categories (P/S and P/EBITDA), has the second-highest dividend yield and ranks second and third in the other two categories (P/B and P/E). If we compare the 5 oil majors by implementing a score system (1.=4, 2.=3, 3.=2, 4.=1, 5.=0), BP will take the lead.
Company | score | valuation rank |
BP | 16/20 | 1. |
TotalEnergies | 14/20 | 2. (two categories won) |
Shell | 14/20 | 3. (one category won) |
Chevron | 4/20 | 4. |
Exxon | 2/20 | 5. |
Share buybacks and dividend increases
BP has introduced a dividend policy which regularly increases the annual distribution by 4% at $60 per barrel Brent oil after cutting the payout in half in the second quarter of 2020 (from 10.5 cents/quarter to 5.25 cents/quarter) when the pandemic hit the economy. Since then BP has raised the quarterly dividend to 7.27 cents (+38.5% or 11.5% p.a.) which exceeds the policy increase of 4%. At current oil prices above $80 per barrel, it is very likely that BP can increase the payout by 10% annually at least.
Year | quarterly payout (cents) | payout yield (%) |
2023 | 7.27 | 4.5 |
2024 | 8.00 | 5.0 |
2025 | 8.80 | 5.5 |
2026 | 9.68 | 6.0 |
Furthermore, BP is strongly committed to share buybacks of at least 40% of surplus cashflow . In 2023 BP allocates 60% of surplus cashflow due to high oil prices. Since the end of 2019, BP has already reduced share count by 14.1% (from 20.241 bn to 17.379 bn shares). In the second quarter of 2023 BP bought back 323 million shares for around $2 bn. At $60 per barrel BP aims to buy shares for $4 bn but due to a good environment for oil companies, BP has spent much more money in 2022 and 2023 for share buybacks.
At a current share price of $6,45 and if oil prices remain above $80, BP will buy back nearly 1 billion shares each year which represents a buyback yield of more than 5%. Hence, the dividend and buyback yield combined is close to 10%.
Future earnings and buybacks in different scenarios
BP's earnings have been volatile for years because of major shocks which have been mentioned before (COVID, Rosneft). However, earnings have always recovered strongly when the environment for oil prices were beneficial. What is the current outlook for oil prices and the most likely scenario?
The most important influences on oil prices are supply and demand (1), economic growth (2) and OPEC policy (3).
1) supply and demand situation
Oil prices have recently risen to $91 ((WTI)) and $95 (Brent) per barrel, an increase of 33% since June. Global oil demand is expected to rise to 102.2 mb/d while supply plunged to 100.9 mb/d in July. In July and August oil demand hit a record of 103 mb/d widening the supply gap. Although the supply situation will improve to 101.5 mb/d by an increased non-OPEC+ oil production, oil demand will exceed oil supply for the next months which will support current oil price levels.
2) economic growth
The global economic output will grow by 3% in 2023 and 2024 . Growth is driven by India, China and other emerging markets while Europe's economy will be outpaced. Economic growth will stabilize oil prices as well as global air traffic which has not reached pre-pandemic levels yet . The global demand for travel is continuously high and consequently, it is likely that global air traffic will surpass pre-pandemic levels which will also boost global oil demand.
3) OPEC policy
OPEC+ supply fell to 50.2 mb/d in July because of a reduced production of Saudi Arabia. The OPEC+ countries are interested in a tight market and won't add a significant amount of supply to the global oil production. The group announced a total of 3.7 mb/d output cut in April and a revision of this decision is unlikely. OPEC+ produces nearly 50% and OPEC 33% of global oil supply. The output cut will limit a production expansion and oil supply won't keep up with economic growth and demand. Hence, the OPEC policy supports high oil prices in the near future.
All in all, a scenario with high oil prices above $80 is very likely (60%) and has consequences for BP's valuation.
oil price scenario | likeliness | EPS ($) | current P/E | share buybacks ()/shares per year/buyback yield (%)/dividend increases p.a. (%) | BP stock fair value ($) |
between $80-100 per barrel | 60% | 0,75-0,85 | 7.6-8.5 | 6.0/0.93/5.4/+10.0 | 10.00 (+55%) |
between $60-80 per barrel | 15% | 0,50-0,65 | 9.9-12.9 | 4.0/0.62/3.6/+4.0 | 8.00 (+24%) |
above $100 | 25% | 0,90-1,05 | 6.1-7.2 | 8.0/1.24/7.1/+15.0 | 12.00 (+86%) |
The first scenario with the highest probability shows a significant undervaluation of BP. Even if we reduce the buyback amount of $6 bn by $700-800 million share based compensation, the buyback yield in combination with future dividend increases support an upside potential of more than 50%. Furthermore, the downside risks are limited as the worst scenario for oil majors still signals an undervaluation for BP. The higher oil prices climb, the more likely and faster BP can surpass pre-pandemic dividend levels.
Conclusion
BP is not only undervalued compared to its peers, the company's shares still would have upside potential if oil prices fell which is not very likely near-term. A combination of economic growth, limited oil supply growth and an increasing demand for air travel are excellent conditions for BP shareholders. In the scenario of high oil prices above $80 per barrel, they can expect increasing dividends and a buyback yield of at least 5%. Finally, the shares have a significant upside potential of 55%.
For further details see:
BP: Significantly Undervalued At Current Oil Prices