Earlier in this series, we discussed BP’s (BP) PEG ratio. In this part, we will consider BP’s forward valuations compared to its peers.
BP (BP) is trading at a forward PE (price-to-earnings) ratio of 19.9x, above its peer average of 18.9x. ExxonMobil (XOM), Chevron (CVX), PetroChina (PTR), and Suncor Energy (SU) are also trading above the average PE ratio at 22.1x, 25.3x, 27.0x, and 31.2x, respectively.
BP (BP) is currently trading at a forward EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] of 5.8x, above the peer average of 5.7x.
Why BP’s valuations crossed over its peer averages
In the last few years, BP’s valuations have stood at a discount to its peer averages. This trend was likely due to a blow to its financials following the Gulf of Mexico oil spill charges and the impact of lower oil prices. As a result, BP saw increased debt levels, and its total-debt-to-capital multiple rose above the peer average.
However, this situation seems to be improving. BP’s financial framework has offered optimism that BP’s cash flow and leverage position can improve. The rising valuation that the market is according BP could be due to BP’s aim to survive the oil price cycle and to prepare for future growth.
BP’s focus on stronger financials and earnings supports this expectation. The company is seeking returns even at the oil price range of $35–$40 per barrel.
BP’s robust upstream project pipeline could add to its total production. The company has started six out of seven mega upstream projects in 2017. BP’s strategy of optimizing capex, reducing cost structure, and selling non-core assets, as well as its upstream pipeline, could improve its financial position. This trend could build up BP’s valuations.