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What BP’s PEG Ratio Tells Us

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Aug. 17 2017, Updated 10:36 a.m. ET

BP’s PEG ratio

The PEG (price-to-earnings-to growth) ratio intends to examine a stock’s valuation after factoring in the expected future growth rate. Here, we’ve taken into consideration BP’s (BP) mean estimate for PEG. The mean estimate is arrived at by considering the stock’s mean PE ratio and its mean blended earnings growth rate. Usually, if everything else is equal, a PEG ratio below 1.0 indicates an undervalued stock.

BP’s PEG ratio stands at 0.30, which is below the peer average of 0.34. The peer average considers the average PEG ratio of eleven global integrated energy companies.

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BP’s growth plans

The PEG ratio considers not only growth rates (in earnings) for the next two years but also a long-term growth rate. To be sure, BP plans to grow earnings via its robust upstream and competitive downstream portfolios.

BP also anticipates upstream growth on higher volumes, led by startups of the large upstream projects. BP has already started three major projects in 2017: the West Nile Delta, the Quad 204, and the Trinidad Onshore Compression.

BP’s organic capital expenditure or capex for 1H17 stood at $7.9 billion. In 1H17, BP incurred 86% in capex from the Upstream segment, 12% from the Downstream segment, and 2% from other businesses.

Notably, BP’s vast proved reserves of 17.8 billion barrels of oil equivalent are likely to provide an improvement in its upstream hydrocarbon production over the long term.

Peer PEG ratios

Chevron (CVX), YPF (YPF), and Suncor Energy (SU) are trading below the peer average PEG ratio at 0.23, 0.23, and 0.02, respectively. But ExxonMobil (XOM), Royal Dutch Shell (RDS.A), Total (TOT), and PetroChina (PTR) are all trading above the peer average PEG ratio at 0.92, 0.35, 0.78, and 0.58, respectively.

Usually, the higher the PEG ratio, the more expensive the stock. ExxonMobil has the highest PEG ratio, while Suncor Energy has the lowest ratio.

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