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BP Stock: Jefferies Upgrades It to ‘Buy’


Jul. 31 2019, Published 7:35 a.m. ET

Jeffries upgraded BP (BP) stock from “hold” to “buy.” The company increased its target price on BP stock from 595 pence per share or $43.4 per ADR to 625 pence per share or $45.6 per ADR.

The upgrade followed BP’s second-quarter earnings release on Tuesday. In the second quarter, BP’s earnings fell less than expected. Also, the company’s EPS beat analysts’ estimate.

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BP stock and its strategic path

BP’s results show that the company will likely achieve its five-year target on gearing, returns, capex, and divestment. The company plans to maintain its gearing within the 20%–30% range from 2019 to 2021. BP plans to return more than 10% on average capital employed by 2021 assuming a Brent price of $55 per barrel.

In the second-quarter earnings call, BP’s group chief executive, Bob Dudley, said, “We are midway through our five-year strategy, we are continuing to deliver strong underlying operational and financial performance and are making clear progress against the five-year plan.”

BP stock rose

On Tuesday, BP stock rose 2.3% despite the fall in the equity market and most of its peers. The SPDR S&P 500 ETF (SPY), which resembles the S&P 500 Index, fell 0.2% on Tuesday. Total SA (TOT), Equinor, and Petrobras fell 1.0%, 0.2%, and 0.7%, respectively. ExxonMobil stock closed almost flat.

However, Chevron and Royal Dutch Shell rose 0.1% and 0.5%, respectively. The Brent oil price rose 1.6% on Tuesday. Read Could Inventory Data Surprise Oil Traders? to learn more.

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BP’s upstream segment grew stronger

In the second quarter, BP’s upstream portfolio has grown stronger. BP announced the start-up of its upstream project Culzean in the North Sea. The company’s organic capex was $3.7 billion in the second quarter compared to $3.5 billion in the second quarter of 2018. In 2019, BP expects its organic capex to be between $15 billion and $17 billion.

Culzean followed BP’s earlier start-ups like Angelin in offshore Trinidad, the second stage of West Nile Development in the Giza and Fayoum fields in Egypt, and the Constellation in the Gulf of Mexico. BP expects one more mega project to start this year. The company has about 23 upstream projects online since 2016. BP expects its net production to rise by 0.9 MMboed (million barrels of oil equivalent per day) by 2021.

BP’s stock forecast for the next ten days

BP stock reacted positively to its earnings. We’ll estimate the stock’s price range for the period ending on August 9 based on its implied volatility.

Considering BP’s implied volatility of 15.2% and assuming a normal distribution of prices and a standard deviation of one, the stock could close between $41.0 and $39.0 per share in the ten days ending August 9.

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Marginal fall in earnings

BP’s adjusted EBIT fell 4% YoY to $5.2 billion in the second quarter. The company’s earnings fell across its business segments.

BP’s upstream adjusted EBIT fell 3% YoY to $3.4 billion in the second quarter. The fall was due to lower liquids and natural gas realizations. The fall was partly offset by higher production. The average hydrocarbon realizations fell from $43 per boe (barrel of oil equivalent) in the second quarter of 2018 to $41 per boe in the second quarter. However, the hydrocarbon production grew 6.5% YoY to 2.63 MMboed.

Total SA’s exploration and production earnings fell from $2.3 billion in the second quarter of 2018 to $2.0 billion in the second quarter. However, Suncor Energy’s earnings in the oil sands segment rose 62% YoY to 651 million Canadian dollars in the second quarter.

BP’s other segments

In the second quarter, BP’s downstream adjusted EBIT fell 6% YoY to $1.4 billion due to lower earnings in the fuels and lubricants segments. However, the rise in the adjusted EBIT in the petrochemicals segment supported downstream earnings. Fuel earnings fell due to lower throughputs. The fall was partially offset by higher margins. BP’s average refining marker margin rose from $14.9 per barrel in the second quarter of 2018 to $15.2 per barrel in the second quarter.

BP’s Rosneft segment includes equity earnings from Rosneft—a giant oil company in Russia. BP owns a 19.8% stake in Rosneft. The Rosneft segment’s adjusted EBIT fell from $766 million in the second quarter of 2018 to $638 million in the second quarter.


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