Overview

BP PLC (BP) is a London-headquartered global energy business with a diverse portfolio across businesses, resource types and geographies, and operations in 78 countries worldwide. It is one of the six supermajor oil group in the world, with operations in Africa, Asia, Australasia, North and South America and Europe. The group was established as Anglo-Persian Oil Company in 1909 with the aim of exploring and producing oil in Persia, which was renamed as the British Petroleum Company in 1954. The group through a series of risky ventures and acquisitions has become one of the biggest names in the energy market, delivering energy products and services to people around the world. The group was listed on the London Stock Exchange in 1954 and is currently a constituent of the FTSE 100 index.
BP is a vertically integrated group with operations in all areas of the oil and gas industry, ranging from upstream, downstream and renewables businesses to manufacturing and marketing fuels and raw materials. The group successfully mitigates exposure to geopolitical events by diversifying across geographical regions, giving it access to growing markets and new resources, and the impact of commodity pricing cycles is cushioned with the help of well-established trading capabilities and a diverse portfolio. By developing and using technology to reduce costs and risks, the group is able to competitively explore new resources, with customers ranging from independent power producers to utilities and municipalities. The group also has renewable energy interests in solar technology, wind power and biofuels, and is the largest trader of natural gas in North America.

Key Statistics


Management

Helge Lund is the Chairman of the group; he was appointed on 1 January 2019 and has an impressive track record of leadership in the oil and gas industry. Bob Dudley has been the Chief Executive Officer of the group since October 2010. The CEO is supported by Brian Gilvary, who is the Chief Financial Officer since 1 January 2012.

Segments

The operations of the group are differentiated in four operating segments, namely Upstream, Downstream, Rosneft and Other businesses and corporate. The Upstream segment consists of oil and natural gas exploration, ?eld development and production activities, which helps in renewing the resource base of the group. It also includes the marketing and trading, storage and processing, and midstream transportation of natural gas. The Downstream segmentis made up of three businesses and is the product and service-led arm of BP, managing global marketing and manufacturing operations, along with trading, supply, transportation and refining of crude oil, petroleum, petrochemicals products and related services. Other businesses and corporate includescorporate activities worldwide, shipping and treasury functions, and the biofuels and wind businesses of the group.

Top Shareholders

 
(Source: Thomson Reuters)

Recent Development

The company on 27 August 2019 announced that it would sell all Alaska operations and interests to Hilcorp for $5.6 billion, including the entire upstream and midstream business in the state, exiting a region where it operated for 60 years. The company believes that the transaction would enable to pursue other opportunities within the disciplined financial framework and further strengthening the balance sheet and underpins the two-year $10 billion divestment programme undertaken by it.

Financial Highlights (H1 FY 2019, in $m)

 
(Source: Company Filings)

Upstream production, which excludes Rosneft, for the first half of the financial year 2019 averaged 2,640mboe/day, 4.2% higher than a year earlier, while production for the quarter was 2,625mboe/day, 6.5% higher than the second quarter of 2018. Underlying production was broadly flat during the period, and it increased by 0.7% in the second quarter. Due to a fall in revenue from downstream segment, which declined to $124,812 million from $130,580 million in the H1 2018 and $66,396 million in Q2 2019 from $69,174 million in Q2 2018, sales and other operating revenues decreased from $143,611 million in H1 2018 to $138,997 million in the current period and $72,676 million in Q2 2019 from $75,439 million in the second quarter of 2018. This reflected in a fall in total revenues and other income as it declined from $146,050 million in the first half of 2018 to $141,154 million in the latest period, while it decreased to $73,747 million in the second quarter of 2019 from $76,907 million in the corresponding period of last year. Profit before interest and taxation was reported at $9,680 million compared to $10,051 million in H1 2018, while profit before taxation was $7,930 million, down from $8,901 million in H1 2018. As replacement cost profit before interest and tax of upstream segment declined to $5,353 million from $6,688 million for the same period in 2018, the corresponding value for the group fell to $8,490 million from $8,658 million in the first half of 2018, despite an increase in the downstream segment to $3,053 million from $2,553 million in H1 2018. Replacement cost profit was $3,870 million for the half-year, compared with $4,178 million in H1 2018, while underlying replacement cost profit was $5,169 million, compared with $5,408 million in H1 2018. Replacement cost profit was $1,775 million for the second quarter, compared with $1,789 million in H1 2018, while underlying replacement cost profit for the second quarter was $2,811 million, compared with $2,822 million in H1 2018. Compared to a profit of $2,799 million and $5,268 million in the second quarter and the first half of 2018 respectively, profit was $1,822 million and $4,756 million for the same periods in 2019, corresponding to basic earnings per share of 23.47 cents in the first half and 8.95 cents in the second quarter. Subsequently, the group announced a quarterly dividend of 10.25 cents per ordinary share. Excluding Gulf of Mexico oil spill payments, operating cash flow was $14.2 billion for the half-year and $8.2 billion for the second quarter, while net debt at 30 June 2019 was $46.5 billion, compared with $38.7 billion a year ago.

Key Performance Indicators

In the financial year 2018, reserves replacement ratio, which measures the extent to which proved reserves added to reserve base during the period covers the production, declined to 100.4%, but was in line with the five-year average reserve’s replacement ratio. Production at 3,683 mboe/day was 2.4% higher than in 2017, while upstream unit production costs rose to $7.15/boe due to the impact of higher prices on production entitlements and increased well-work activity. Refining availability, which is an important indicator of the operational performance of the Downstream businesses and shows the percentage of the year that a unit is available for processing after various deductions, was lower than 2017 but remained strong.

Financial Ratios


 (Source: Thomson Reuters)

Ratios Commentary

In the financial year 2018, though the profitability margins increased, they were still considerably lower than the industry median, indicating that the company can drive operating efficiency by reducing costs. The liquidity ratios also declined during the period and were below the industry median. Moreover, the group was more leveraged than its competitors but was in line with previous years. However, the asset turnover ratio of the group was considerably better than its peers and showed an improvement over the year, suggesting that the group was optimising its resources properly.

Valuation Methodology
Method 1:EV/EBITDA Multiple Approach (NTM)


To compare BP with its peers, EV/EBITDA multiple has been used. The peers are Equinor ASA(NTM EV/EBITDA was 2.89), Eni SpA(NTM EV/EBITDA was 3.42), Repsol SA(NTM EV/EBITDA was 4.21),Total SA(NTM EV/EBITDA was 4.85), Royal Dutch Shell PLC(NTM EV/EBITDA was 4.99), Galp Energia SGPS SA(NTM EV/EBITDA was 5.23) andExxon Mobil Corp(NTM EV/EBITDA was 7.26). The median of EV/EBITDA (NTM) of the company’s peers was 4.85x (approx.).

Method 2: Price/Earnings Multiple Approach (NTM)
 

To compare BP with its peers, Price/Earnings multiple has been used. The peers are Equinor ASA(NTM Price/Earnings was 10.39), Eni SpA(NTM Price/Earnings was 10.68), Galp Energia SGPS SA(NTM Price/Earnings was 13.22),Chevron Corp(NTM Price/Earnings was 15.35), andExxon Mobil Corp(NTM Price/Earnings was 16.66). The mean of Price/Earnings (NTM) of the company’s peers was 13.26x (approx.).

Share Price Commentary


Daily Chart as at 11-September-19, before the market closed (Source: Thomson Reuters)

On 11 September 2019, at the time of writing the report (at 10:40 am GMT, before the market closed), BP was trading at GBX 513.8, up by 0.21 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 603.60/GBX 481.35. The company’s stock beta was 1.42, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £104.42 billion, with a dividend yield of 6.62 per cent.

Risks Assessment and Growth Prospects

The prices of various commodities which the company markets can be subject to significant fluctuations, and as the prices are affected by global supply and demand, the company does not have any influence on the market prices, which can lead to a significant impact on the financials and affect the business assumptions. Also, since the company had operations in diverse regions, adverse exchange rate movements can impact the bottom-line numbers. Demand for products can also be impacted by the decelerating economic growth in China and India, which are a leading importer of energy products, and its demand is a strong driver of price. In the short-term, the company expects to face challenges from macroeconomic and geopolitical uncertainties, not least from the continuing global trade tensions, which has impacted global growth. Adecrease in the oil, gas or product prices due to the influence of OPEC, global economic conditions, technological change, increased supply from new oil and gas sources and political developments, could adversely impact revenue, margins, profitability and cash flows.

The group is well mitigated against any downside risk in any one region or commodity, as the group owns and operates assets in a wide range of commodities across many countries, offering the group a much-needed diversity. Recognising the need to differentiate from its peers, and prepare for the future demand of energy, the group is increasingly making a push towards renewable sources of energy, which ensures sustainable growth in the business. With the help of ongoing operating cash flow delivery and disposal proceeds from the $10 billion programme, the company expects gearing to trend down through 2020. By lowering costs through deploying new technologies and deploying rigorous cost minimising programs, the company seeks to maximise output from its portfolio in an efficient way.

Conclusion

Over the last five years, the revenue of the group in the first half has risen by a CAGR of 3%, while gross profit grew by a CAGR of around 5%.Three years back, the group started making an operating profit and has delivered growth in operating profit in the last three years of 36.88%, while the corresponding CAGR increase in net profit has been 43.47%. The diversity in operations and strong industry connections underlie the future growth of the company, supported by strong fundamentals.

Based on the decent growth prospects, and supported by valuation undertaken using the above two methods, we have given a “BUY” recommendation at the closing  price of GBX 512.70 (as on 10 September 2019) with single-digit upside potential based on 13.26x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.) and 4.85x NTM EV/EBITDA (approx.) on FY19E EBITDA (approx.).
 
*The buy recommendation is also valid for the current price as covered in the report (as on 11-September-19).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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