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How will BP’s share price fare in the wake of COVID-19?

BP’s [BP] share price is down 41.4% for the year to 24 August. Although it is 20.7% above its 18 March low of 233.70p, the share price is 49% down on its 52-week closing high of 524.60p, which it climbed to on 16 September 2019. 

While BP’s share price has rallied in the last five months, the cyclical nature of oil and gas stocks means that it’s not implausible for BP’s share price to drop further, especially as the company is at the mercy of falling oil prices. 

Conversely, however, and despite the fact that the company revealed a quarterly loss of $6.7bn in its second-quarter earnings, BP’s share price closed up 6.5% on that day.

What’s happening with BP’s share price and what’s its outlook?

 

 

Rethinking value

Due to the fluctuating Brent Crude price, BP has decided to wipe up to $17.5bn off the value of its fossil fuel assets. The decision was made in June on the basis that it has forecast the average price of Brent Crude between now and 2050 to fluctuate between $50–60 a barrel, down as much as 28% from its previous forecast of $70 a barrel.

Although the price of Brent Crude is currently more than double the level it fell to during the market selloff in March, it remains precariously low — around $45 a barrel. For the second part of 2017 and all of 2018 and 2019, the price remained above $50 a barrel. 

$17.5billion

Amount wiped off BP's fossil fuel assets valuation

  

Even if the reality isn’t as bleak as this and the price of Brent Crude rallies — IHS Markit has forecast that the price will be $40–$45 a barrel in the second half of next year — BP won’t halt the shredding of assets.

Not only has COVID-19 caused oil producers to rethink the value of their companies, but it is also accelerating the shift to renewable energy.

BP has said that it will speed up its net-zero ambitions, increasing low carbon investments from $500m last year to $5bn a year by 2030. The oil producer is also targeting 50GW of net renewable generating capacity by this deadline — a 20-fold increase on 2019, it says.

BP’s ambition to become one of the world’s largest renewable power generators has received both criticism and cautious praise from climate campaigners.

Also announced during the earnings call on 3 August was a dividend cut. According to AJ Bell personal finance analyst Laura Suter speaking on the company’s Money and Markets podcast, BP’s share price bounce could be attributed to investors responding positively to the news that the dividend cut wasn’t as aggressive as it could have been.

Dividends will be reduced by 50%, compared to the two-thirds reduction announced back in April by Shell [RDSA.L]

50%

BP's dividend reduction

  

Leaning on lower multiples

Ahead of the earnings call in July, Jefferies analyst Jason Gammel argued that the dividend cut had already been factored into the current share price, given its then-yield of 10.6%.

“The first time our team has ever upgraded a stock to buy when the risk of an imminent dividend cut was possible, but we believe a cut of 65% is already priced into the stock,” noted Gammel in a note to clients as reported by Barron’s.

“The first time our team has ever upgraded a stock to buy when the risk of an imminent dividend cut was possible, but we believe a cut of 65% is already priced into the stock” - Jefferies analyst Jason Gammel

 

Following the latest earnings, Jefferies reiterated a buy rating and set a share price target of 350p.

Even though BP is facing headwinds in the short term, Piper Sandler analyst Ryan Todd sees BP’s share price as more worthy of investment than US counterparts, because of its lower multiples. 

“We see valuation at the European majors as more attractive relative to the US majors than they have been in some time, with multiples, break-evens, and free cash flow yields at historically large discounts, while improving visibility on the medium- and long-term strategy should at least partially alleviate concerns on near-term risks,” Todd wrote in a note, also reported by Barron’s.

According to MarketBeat, BP currently has 20 ratings. A majority of 12 are a buy, four a hold and four a sell. The consensus 12-month share price target of 398.25p would represent a 41.2% upside on close on 24 August.

 

Market Cap$74.817bn
EPS (TTM)-6.50
Operating Margin (TTM)-4.37%
Quarterly Revenue Growth (YoY)-56.4%

BP share price vitals, Yahoo Finance, 25 August 2020

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