BP (BP) stock has been weak this year—it has risen 0.2% quarter-to-date but has fallen 2.2% year-to-date. Although the oil company’s low third-quarter earnings weighed on its stock, crude oil prices’ recent rise has been supporting it. Let’s look at whether it’s a good time to buy BP stock.
BP stock driven by crude oil prices
Changes in crude prices have sharp effects on BP stock, as oil prices and BP stock are positively correlated. This year, BP’s and WTI’s prices have had a correlation coefficient of 0.65.
Oil peers ExxonMobil (XOM), Royal Dutch Shell (RDS.A), and Chevron (CVX) are also affected by oil prices. This year, XOM, RDS.A, and CVX have had correlations of 0.55, 0.58, and 0.49, respectively, with WTI.
While oil fundamentals are weak, they could recover next year. Oil prices are affected by US-China trade updates, OPEC production cuts, and geopolitical news. Any positive news on any of these fronts could boost oil prices and BP stock.
BP stock dividend yield
BP stock is roaring with a 6.5% dividend yield, which is higher than most peers’. In comparison, XOM and CVX yield 5.1% and 4.0%, respectively. Total (TOT) and Suncor Energy (SU) have smaller yields, of 5.5% and 4.0%.
BP’s upstream output growth
BP’s vast crude oil and natural reserves are boosting its output. In this year’s first nine months, BP’s oil and gas production rose by 4.2% year-over-year to 2.6 million barrels of oil equivalent per day. Plus, the company’s robust pipeline of projects is set to add to its hydrocarbon output.
BP expects new and upcoming projects to add 900 thousand barrels per day in production by 2021. Therefore, if oil prices rise, BP’s earnings could rise significantly in the long term.
Outlook and valuation
Next year, analysts expect BP’s EPS to rise 15% to $3.40. Meanwhile, they expect Chevron’s, Total’s, and Suncor’s EPS to rise by 8%, 9%, and 1%, respectively.
BP stock currently trades at 11.1 times analysts’ 2020 EPS estimate. ExxonMobil’s and Chevron’s forward PE multiples are 18.0x and 17.2, respectively.
BP’s weak area is debt
BP, with a total-debt-to-capital ratio of 43%, has high debt. This debt includes a significant portion of lease liabilities. The company’s debt increased after new accounting standards on leases came into effect this year. Its debt ratio is significantly higher than peers’ average of 29%.
However, the company is working toward reducing its debt. In BP’s third-quarter earnings call, CFO Brian Gilvary said, “Assuming recent average oil prices, and in line with expected growth in free cash flow and receipt of divestment proceeds, we continue to expect net debt levels to reduce and gearing to move towards the middle of our targeted range of 20% to 30% through 2020.”
BP has a high correlation with crude oil prices, which could recover. It also boasts a high dividend yield, positive earnings outlook, and cheap valuation. Its only weakness is debt, which BP is working on improving. So, all in all, it looks like a good time to invest in BP stock.