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Is BP Ready for Lower Oil Prices?

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Part 16
Is BP Ready for Lower Oil Prices? PART 16 OF 17

Where BP’s Valuations Stand among Peers

BP’s valuations

BP (BP) is now trading at a forward PE (price-to-earnings) ratio of 17.3x—just below its peer average of 17.8x. Royal Dutch Shell (RDS.A), Total (TOT), and Petrobras (PBR) are also trading below the peer average at 13.9x, 11.8x, and 12.7x, respectively. But ExxonMobil (XOM), Chevron (CVX), and Suncor Energy (SU) are trading above the average at 21.0x, 24.2x, and 28.7x, respectively.

BP (BP) is trading at a forward EV-to-EBITDA (earnings before interest, tax, depreciation, and amortization) multiple of 5.7x. This ratio has recently crossed over the peer average of 5.6x.

Where BP’s Valuations Stand among Peers

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BP’s valuations and peer averages

Over the past few years, BP’s valuations have indicated a discount to peer averages—likely due to its Gulf of Mexico oil spill charges and the slump in oil prices. These factors also led to a surge in BP’s debt levels, and so its total-debt-to-capital rose above the peer average.

Now BP’s situation seems to be improving. BP’s financial framework has given some investors hope that its cash flow and leverage positions can improve. BP’s rising valuations are likely due to its aim to survive the oil price cycle while preparing for future growth. Its focus on sturdy financials and earnings, aimed at providing returns even at $35–$40 per barrel oil price range, also attests to this.

Meanwhile, BP’s robust upstream project pipeline is likely to bring in higher production in 2H17. BP’s strategy—of optimizing capex, reducing cost structure, and selling non-core assets—and its higher hydrocarbon output should help BP’s financial position if oil prices rise. Perhaps this is what has been helping BP’s valuations.

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