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Why Are BP’s Valuations Higher than Its Historical Average?

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BP’s price-to-book multiple

In this article, we’ll evaluate BP’s (BP) historical valuation trends. Let’s begin by looking at its price-to-book value ratio (or PBV).

Falling oil prices have led to many projects’ becoming unviable for BP and other integrated energy companies such as Petrobras (PBR), Chevron (CVX), and Royal Dutch Shell (RDS.A). This has resulted in impairments in upstream segments’ affecting the book values of these companies. Examining PBV can provide a glimpse of BP’s market value compared to its book value.

BP’s PBV stood at an average of 1.1x from 1Q14 to 1Q16. In 2Q14, the ratio saw a high of 1.23x. This was followed by impairments in 4Q14, which impacted BP’s book value.

The fall in its stock price was sharper compared to the fall in its book value, leading to a fall in its PBV. Currently, BP is trading at a PBV of 1.1x, in line with its historical average.

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BP’s EV-to-adjusted EBITDA and price-to-cash flow

From 1Q14 to 1Q16, BP’s EV-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) and price-to-cash flow ratios stood at averages of 5.5x and 4.8x, respectively.

Currently, BP is trading at an EV-to-adjusted EBITDA multiple of 7.3x and a price-to-cash flow multiple of 5.1x, above its historical averages.

For exposure to the energy sector, you can consider the iShares Core S&P Total U.S. Stock Market ETF (ITOT). The ETF has ~7% exposure to the sector.

Why is BP trading higher than its historical averages?

BP is trading at valuations higher than its historical averages because its stock price hasn’t fallen as steeply as its earnings and cash flows. The Market likely expects BP to sail through the low oil price cycle on account of its strict action plan to reduce costs, cut capital expenditure, and optimize its asset portfolio.

To learn about how BP is positioned compared to its peers in terms of forward valuations, read on to the next article.

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