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BP share price: can the company cut enough debt to see earnings grow?

BP had a stellar 2018. Profits doubled to hit a five-year high driven by the expansion of its US shale operation. This momentum has continued well into 2019 with the share price making solid gains compared to rivals Shell and Total. 

The question now is whether it can reduce its vast mountain of debt in order to increase earnings.

 

What happened in BP’s 2018 earnings?

BP's full-year results saw profit come in at $12.7 billion, double the previous year’s $6.17 billion and well above analyst predictions. Earnings per share came in at $1.02. Production rose to 3.7 million barrels of oil a day, helped by the acquisition of BHP.

The oil and gas giant also settled the vast majority of payments following the Deepwater Horizon disaster. These payments have totalled $70 billion to date.

 

Market cap£117.26bn
PE ratio (TTM)12.44
EPS (TTM)46.70
Total debt/equity (MRQ)79.22

BP stock vitals, Yahoo finance, 23 April 2019

 

In the longer term, expectations are for earnings to climb 18% this year, 38% in 2021, before hitting $13bn in 2022. To achieve this, the company will have to go some way to cutting its growing debt.

 

Can BP cut its debt to increase profits?

BP is sitting on a £80.44bn debt pile, representing a staggering 79% of the company's net worth. Five years ago, this figure was 37.2%. Adding to the debt was the first, and largest, payment for its $10.7 billion purchase of BHP.

Shifting this debt is a priority for the company. To do this, BP has looked to unload its portfolio of U.S. onshore sale assets. Collectively these are worth a combined $7bn and include assets in Oklahoma's Anadarko and Arkoma Basins.

£80.44bn

BP's debt pile as of MRQ results

BP is also making cuts to BPK, its U.S. onshore arm, to shed $10bn worth of assets.

Investors will be keen to see if this continued sale of assets through 2019 and 2020 will help profit margins.

 

How do analysts rate BP?

Analysts are more or less backing the stock. In the last three months of 2018 both Raymond James and Morgan Stanley upgraded their ratings. One minor blip has been wealth manager RBC downgrading the stock from Top Pick to Outperform.

Still, RBC has maintained a target price of 625p, which represents 10% potential upside based on the current share price. One reason for the slight souring among analysts is BP's rising share price, which has closed the gaps on some of the price targets out there.BP 1-year share price performance, CMC Markets, 23 April 2019

 

In Q1 earnings due out at the end of April, earnings per share are expected to climb slightly to $0.81.

 

Can rising oil prices drive BP’s share price higher?

Since the start of the year, BPs share price is up 15.4%, outpacing rival Shell's more modest 7% gains. Right now, the stock is trading above its 50-day moving average, but below its 52 week high. A trailing P/E ratio of 12.44 makes it more expensive than Shell's (8.7) and Total’s (11.79).

Unsurprisingly, the stock is heavily influenced by the price of oil. Yesterday Brent hit $74.34 a barrel, as Trump said the US would end waivers for any country currently importing Iranian oil. BP’s share price popped 3% on the news, validating the company’s decision to avoid Iranian oil. 

3%

BP's share price jump on the news of Trump's policy

Other growth factors have been the recent violence in Libya, a drop in the US stockpile and the resurgence of oil demand from China.

Yet, Russian finance minister Anton Siluanov hinted that Russia and OPEC could start to pump more oil this year. This would drive down prices in a fight for market share with the US. 

Being so closely tied to oil prices is a double-edged sword. Back in December the stock plummeted as macroeconomic events weighed on oil markets. If Russia and OPEC do increase production, BP could see its share price drop.

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