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BP’s Forward Valuations Compared to Its Peers

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BP’s valuations

In the previous parts of this series, we looked at BP’s (BP) stock performance, moving averages, stock price forecast range, dividend yield trend, and analyst ratings for the stock. In this part, we’ll look at BP’s forward valuations compared to its peers.

BP (BP) currently trades at a forward PE (price-to-earnings) ratio of 16.4x, marginally below the average forward PE of 16.6x. But BP is trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio of 5.5x, which is above the peer average of 5.4x.

Like BP, Royal Dutch Shell (RDS.A) is also trading below its forward PE ratio but above its forward EV-to-EBITDA ratio. However, ExxonMobil (XOM), Chevron (CVX), and PetroChina (PTR) are trading above their averages.

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Why are BP’s valuations improving?

In the past few years, BP has traded at a discount to both peer averages. That’s likely due to the blow to its financials from the Gulf of Mexico oil spill charges and the fall in crude oil prices. That led to quite a surge in its debt levels. Its total debt-to-capital rose above the peer average.

But now the situation seems to be improving. Rising oil prices have given BP hope that its cash flow and leverage positions could improve. The robust upstream project pipeline could also support higher production in the second half of 2017. So the company’s strategy (optimizing capital expenditure, reducing cost structure, and selling non-core assets) coupled with more hydrocarbon output in the scenario of higher oil prices should likely improve BP’s financial position. It’s this hope that is possibly building up BP’s valuations.

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