BP’s valuations

Earlier, we discussed BP’s (BP) short interest trend. In this article, we’ll examine BP’s forward valuations compared to those of its peers.

Why BP Is Trading at a Discount to the Peer Average Valuations

Currently, BP (BP) is trading at a forward PE multiple of 12.0x, below the peer average of 13.0x. However, ExxonMobil (XOM), Chevron (CVX), PetroChina (PTR), and Suncor Energy (SU) are trading above the peer average at PE multiples of 17.1x, 16.6x, 14.9x, and 17.0x, respectively. In contrast, peers Royal Dutch Shell (RDS.A), Total (TOT), and YPF (YPF) are trading below the peer average at PE multiples of 11.1x, 10.5x, and 12.6x, respectively.

BP is trading at a forward enterprise value-to-EBITDA multiple of 4.7x, again below the peer average of 4.9x.

Why is BP trading below the peer average?

BP stock has risen 10% in the current quarter. Despite its rise, BP stock is trading below the peer average on both valuation metrics.

BP has a robust upstream portfolio, which has a strong pipeline of projects. The company expanded via capex and acquisitions in 2018. However, its cash flow from operations fell short of covering its capex, acquisition, and dividend outflows in the year. 

Usually, a shortfall isn’t good for a company, as it could result in forced decisions such as raising debt or divestments. BP’s shortfall as a percentage of its earnings capacity (cash flow from operations) stood at 33% in 2018. In contrast, ExxonMobil, Chevron, and Shell had cash flow surpluses of 7%, 27%, and 27%, respectively, in 2018.

Further, BP’s debt position doesn’t look favorable. The company’s total debt-to-capital ratio of 39% stood above the peer average. A higher ratio reduces a company’s financial strength and flexibility to handle tough times. ExxonMobil’s, Chevron’s, and Shell’s ratios stood at 16%, 18%, and 28%, respectively, in 2018.

Thus, in 2018, BP’s above average debt-to-capital ratio and cash flow shortfall made it financially weak compared to its peers.

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