Investor snapshot: Valuing BP compared to its peers like Chevron


Nov. 20 2020, Updated 4:15 p.m. ET

Comparable company analysis

Among its peers, BP is the smallest company by market capitalization and enterprise value (or EV)


BP PLC (BP) has the lowest EV-to-EBITDA[1. Enterprise value to earnings before interest, tax, depreciation, and amortization] multiple (5.1x) of this group. Exxon Mobil (XOM) has the highest EV (approximately the summation of its equity value and net debt) when scaled by EBITDA in the group (EV/EBITDA of 7.8x). XOM is a component of the Energy Select Sector SPDR (XLE).

Debt levels

BP’s net debt-to-EBITDA multiple (0.78x) is above the group average. All its peers have net debt-to-EBITDA multiples less than one. This indicates sufficient liquidity to pay off debt.

BP’s debt-to-equity multiple is also the highest, at 0.37x. XOM has the lowest financial leverage, at 0.13x. In 2Q14, BP raised ~$6.8 billion in debt.

Price-to-earnings ratio (PE)

Shell’s (RDS-A) last-12-month (LTM) price-to-earnings multiple is the highest in the group at 20.3x. Chevron’s (CVX) price-to-earnings multiple, at 12.0, is the lowest. BP’s last-12-month price-to-earnings multiple trades ~8% below the industry average.

A higher price-to-earnings multiple typically indicates a market expectation for higher earnings growth or superior earnings quality (margins and consistency).

However, for full-year 2014, BP has the lowest forward price-to-earnings ratio at just 9x. This multiple reflects analyst expectations of strong growth in profits this year. This could also indicate that BP currently trades at a low valuation compared to its peers.

Forward price-to-earnings ratios consider sell-side analysts’ consensus estimate of earnings for the year.

However, BP’s quality of earnings (denoted by profit margin and return on equity) is among the weakest in the group. But with its solid asset turnover ratio (above one) and a comfortable debt-to-equity ratio, indicating no near-term liquidity crunch, BP could be cheap at these levels.

BP’s estimated earnings per share growth rate is ~6.3%.

Dividend yield

Despite the strain that the Macondo incident put on BP, the company continues to reward shareholders handsomely in the form of share buybacks—which boost earnings per share. It has also been paying hefty dividends.

From the table above, we can see that in this respect, BP is only second to XOM in terms of dividend yield (dividend divided by share price). This is another reason why BP could be cheap.

However, given all that we’ve discussed, you should keep in mind that the market may be valuing BP at lower levels on perceptions of risks or threats that may not only be in financial ratios.

Other important developments

Check out Market Realist’s Energy & Power sector page for more interesting articles on the industry. Learn what’s been happening lately in the sector.

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