2023-05-01 14:02:50 ET
Summary
- BP's FY 22 results were exceptionally disappointing given that several peers including XOM and CVX reported record profits.
- Despite record operating profits in 2022, BP reported net losses that can be directly traced to the UK's windfall tax.
- BP will report FQ1 2023 earnings pre-market on May 2nd. Several peers have already reported analyst estimate beating FQ1 23 results.
- I recommend most investors watch BP earnings closely and consider waiting for at least a minimal indication of improving sentiment in the broader energy sector before adding to an existing position or initiating a new position.
UK Windfall Tax
In early July of last year, British lawmakers approved a 25% windfall tax on oil and gas producers in the British North Sea with the intention of redistributing energy profits to citizens struggling with soaring energy bills. I feel like it is generally best to leave politics out of most investing decisions. However, I am convinced trifling with the market in this way is likely foolish and may have unintended consequences. A free market would naturally balance itself over time as consumers consumed less and producers produced more.
The broader results of the UK's windfall tax remain to be seen, but the impact on BP p.l.c. ( BP ) are already apparent. BP reported FQ4 22 and FY 22 results on February 7th. Those results were mixed for the quarter with revenue beating expectations by 13% while normalized EPS missed expectations by 4%. Full year results are best understood by examining the windfall tax's impact.
BP Profits and Tax Rate
Author, SA Data
Despite record yearly gross and operating profits, BP reported a yearly net profit of -$2.5B. To be clear, BP lost $2.5B over a year when many integrated energy companies reported record profits. Taxes/gross profit is plotted in red against the right axis. BP's tax rate with relation to gross profits increased from 18% in FY 21 to 24% in FY 22.
Upcoming Earnings
BP will report FQ1 23 earnings pre-market on May 2nd. Analysts expect BP's normalized earnings to fall to $1.42/share while revenue is expected to decline to $58.42B.
BP Peers' FQ1 23 Earnings
TotalEnergies SE ( TTE ), Chevron Corporation ( CVX ), and Exxon Mobil Corporation (XOM) have already reported FQ1 23 earnings with results summarized in the plot.
BP's peers have generally equaled or beat analyst expectations. Notably, CVX reported a doubling of its US downstream profits YOY while its international downstream profits increased 430% on growing refining margins. Investors who are interested in refining margin trends may find Refining Sector Earnings Trends And Expectations helpful.
Lastly, investors who are considering trading BP around earnings may wish to know how accurate analyst coverage has been historically.
BP: Estimates vs Results
Author, SA Data
Over the last several quarters, analysts have generally underestimated BP's revenue and earnings . Given that peers have so far generally exceeded estimate and widening refining margins, there appears to be a good chance that BP will meet or beat analyst expectations.
BP: Comparable Peers' Average PE Price Estimate
Assuming large-cap integrated energy companies are fairly valued as a group, six comparable peers were selected for valuation based on average PE ratio.
BP Share Price Estimate
Author, SA Data
Based on peers' average PE and BP estimated FY 23 earnings , BP share value was estimated at $44.57, suggesting about 10% upside vs its current share price. In order to approach $44.57, BP will likely have to not only meet earnings expectations but also benefit from some positive sentiment in the broader energy sector.
Risks
Demand destruction and recession are both risks across the entire oil and gas sector. Oil and gas markets are volatile and subject to fear and speculation. Recession, or even continued fear of recession, could drive energy markets down.
Energy producers can be exceptionally volatile. Further, BP last reported an exceptionally disappointing year and faces the further headwind of windfall profit taxes until 2025.
Conclusions
BP's recent fiscal year losses were exceptionally disappointing given that several peers including XOM and CVX reported record profits. BP's FY 22 losses can be directly traced to UK's windfall tax on energy profits in my view. However, that same legislation may offer a path to recovery.
Under the windfall tax legislation, a tax break is included for investments in new oil and gas supplies. Additional offsets are also allowed with relation to costs associated with decommissioning old assets and electrification of existing assets.
Analysts expect BP earnings to grow in 2023. Assuming analyst expectations are correct, upside was estimated at about 10% based on average peers' PE ratios. However, I recommend most investors watch BP earnings closely and consider waiting for at least a minimal indication of improving sentiment in the broader energy sector before adding to an existing position or initiating a new position. More aggressive investors may want to look for a bottom around gloomy market sentiment or falling energy prices.
If you argue against all your sensations, you will then have no criterion to declare any of them false. - Epicurus, Principle Doctrines
For further details see:
BP: U.K. Windfall Tax And Earnings Preview