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Why More than Half of Analysts Rate BP as a ‘Hold’

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Majority of analysts rate BP as a “hold”

Analysts’ ratings for BP (BP) show that 31% of those surveyed rate it as “buy.” Another 62% rate it as a “hold.” The highest 12-month price target for BP stands at $43, indicating a 33% rise from its current levels.

However, 7% of analysts rate BP as a “sell.” The stock’s lowest price target of $28 implies a 13% fall in its price. Its average 12-month price target stands at $36, indicating a 12% rise from its current levels.

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BP’s peers Petrobras (PBR), PetroChina (PTR), and Cenovus Energy (CVE) have been rated as “buys” by 11%, 25%, and 46% of analysts, respectively. If you’re looking for exposure to integrated energy sector stocks, you can consider the iShares North American Natural Resources ETF (IGE). The ETF has ~22% exposure to the sector.

BP combats lower oil price environment

To combat lower oil prices, BP is working toward realigning its cost structure. The company plans to rebalance its sources and uses of cash by 2017 at an oil price level of $50–$55 per barrel. By 2017, the company aims to reduce its annual cash costs by $7 billion over 2014.

BP continues to restructure its portfolio by divesting non-strategic assets. The company’s divestment proceeds in 1Q16 stood at $1.1 billion, compared to $1.7 billion in the same period last year. BP expects divestment proceeds to be in the range of $3 billion–$5 billion in 2016.

As a part of its divestment program, BP announced on May 19, 2016, that it had sold an 11.5% stake in Castrol India. Going forward, BP expects divestments of $2 billion–$3 billion in 2017.

BP also continues to optimize its capital expenditure (or capex). BP’s organic capex for 1Q16 stood at $4.0 billion, compared to $4.5 billion in 1Q15. BP expects its capex for 2016 to be around $17 billion, with an option of reducing it to within the range of $15 billion–$17 billion if the situation warrants it.

BP’s strategy of lowering costs, divesting non-strategic assets, and optimizing capex could work in its favor, but until concrete results are visible in terms of improving fundamentals, most analysts are likely adopting a cautious approach, rating the stock as a “hold.”

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