What BP’s Price-To-Earnings-To-Growth Ratio Reveals



BP’s price-to-earnings-to-growth ratio

Previously, we looked at BP’s (BP) short interest. In this part, we’ll switch to a valuation analysis, beginning with the PEG (price-to-earnings-to-growth) ratio. The ratio represents a stock’s valuation after factoring in its expected future growth rate. We’ll use a mean estimate, which is arrived at by considering BP’s mean price-to-earnings ratio and its mean blended earnings growth rate. Everything else being equal, a PEG ratio less than one usually signifies an undervalued stock. BP’s PEG ratio stands at 0.28, below the average of 0.31 in a group of ten global integrated energy companies.

Article continues below advertisement

BP’s growth plans

The PEG ratio considers not only earnings growth rates for the next two years but also long-term growth rates. BP plans to grow earnings through its robust upstream and competitive downstream portfolios. BP anticipates upstream growth, in terms of higher volumes, due to the start-up of major upstream projects. BP kickstarted its major project in the West Nile Delta in 1Q17, and its organic capex stood at $3.5 billion. In 1Q17, 84% of BP’s capex was in the upstream segment and 13% was in the downstream segment. Its vast proven reserves of 17.8 billion barrels of oil equivalent are likely to provide long-term growth to its upstream hydrocarbon production.

Peers’ PEG ratios

Peers Chevron (CVX), YPF (YPF), and Suncor Energy (SU) also have PEG ratios below the peer average, at 0.16, 0.29, and 0.01, respectively. However, ExxonMobil (XOM), Royal Dutch Shell (RDS.A), and Total (TOT) are trading above peer average, at 0.57, 0.32, and 0.85, respectively. Usually, the higher the PEG ratio, the expensive the stock. Among global integrated energy companies, Total has the highest PEG ratio, while Suncor has the lowest.


More From Market Realist