British Petroleum: Is There Room To Run After Its 33% Year-To-Date Rally?
In one of the most seismic shifts that we’ve ever seen in the energy sector, large integrated oil and gas names are starting to shift their mindsets and business plans towards a more renewable future. These moves come as more and more countries around the world adopt green energy futures and more and more corporations, in all sectors of the market, put a strict focus on ESG (environmental, social, and governance) policies due to pressure from shareholders. What’s more, ongoing innovation and improvement of technology in the renewables space, making strong profits a realistic outcome. Granted, the transition from fossil fuels as the world’s primary energy source towards a more green energy future isn’t going to happen overnight.
Demand for energy continues to rise across the world coming out of the pandemic and the fact is, there isn’t enough renewable capacity to meet these demands. Yet, higher sales/cash flows coming from crude sales in the present is likely to accelerate the renewable investments that many integrated oil names are making. And, with this trend in mind, we noticed that there was a lot of chatter amongst the blue chip analysts that the Nobias algorithm tracks regarding one “big oil” name in particular as of late, and that is British Petroleum (BP).
Stephen Guilfoyle, a Nobias 3-star ranked analyst, began his recent piece on TheStreet.com, highlighting BP’s leadership position amongst oil names in the recent “green” transition, saying: “As far as "Big Oil" goes, BP plc (BP) , the old British Petroleum, has been well ahead of the others in at least talking up a good game, better than its peers, as far as ‘going green’ is concerned. BP had set goals of being a ‘very different’ company by the year 2030, and exist with a "net zero" carbon footprint by 2050. Sure plenty of corporations are setting such goals, and all of ‘Big Oil’ has started talking that game, but BP has clearly, in my opinion... been out front.”
Offshore Windsource, a Nobias 4-star rated analyst, recently published a report which highlighted the rapid expansion of investment that they’re seeing in the European wind markets. With regard to the broader trend at play here, Offshore Windsource said, “Currently, European supermajors are expected to increase their offshore wind generation capacity from around 400MW in 2020 to 8,200MW by 2030. Although this only accounts for 3% of our expected total installed capacity it should be noted that this figure represents only current equity participation with significant potential for upside given the rapid momentum observed over the past 12 months.”
The firm also noted that BP was a “big winner” in a recent UK seabed leasing auction, where the company, in partnership with German utility EnBW, received “the rights to 3GW of this new capacity”. And, BP isn’t just investing in wind assets. As Guilfoyle notes, the company is also investing heavily in solar as well. He said, “BP announced on Tuesday morning that the firm would pay $220 million to purchase 9 GW (gigawatts) of solar projects in the U.S. from 7X Energy. These assets are not currently producing solar power, but increase BP's total pipeline of renewable energy projects to 23 GW. The firm had set goals of increasing net developed renewable generating capacity to 20 GW by 2025 and to 50 GW by 2030.”
Nobias 5-star rated analyst, Jamie Ashcroft, recently published an article on BP expressing a similar bullish outlook, calling the stock “misunderstood” by investors, and highlighting a recent report by Barclays analysts, which said that the firm believes, “That BP’s switch to low carbon will eventually be rewarded by investors but, in the meantime, they see the price being driven by the underlying hydrocarbons business.”
Ashcroft quoted the Barclay’s report which said, “Our analysis shows the cashflow generation of the business as having the ability to support a 10% cash return to shareholders in the form of dividends and buybacks in a US$60 per barrel environment - the highest in the sector.” And, sticking to the theme of using hydrocarbon cash flows to invest in a carbon-free future, Ashcroft noted that the analysts said, “The aggregate cashflow of the traditional units is enough to allow bp to ensure competitive cash returns to shareholders, continue to reduce debt, and invest in its low-carbon business.”
In his piece, Guilfoyle also mentioned that Barclays analyst Lydia Rainforth recently named BP the firm’s "top pick" in the European integrated oil and refinery segment. Guilfoyle quoted Rainforth as saying, "The aggregate cash flow of the traditional units is enough to allow BP to ensure competitive cash returns to shareholders, continue to reduce debt and invest in its low-carbon business." This report made headlines across the financial news industry. Rainforth also recently discussed her firm’s big call on CNBC’s “Worldwide Exchange” where she said, “Ultimately, the switch to low carbon will be rewarded by the shareholders. We’re looking at a stock that has a five per cent dividend yield and can potentially double that through the process of share buybacks as well. So, for us, the reasons for our big call are very clear.” However, as bullish as Barclay’s appears to be on BP, the fact is, the company has had plenty of issues in the recent past.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Alan Oscroft, a Nobias 4-star ranked analyst who publishes his work at the Motley Fool, recently highlighted BP’s 2020 struggles in an article, saying, “Investors once saw BP as a top long-term dividend payer. Through all sorts of crises, the dividend didn’t flinch. But the 2020 oil price crash, after the Covid-19 pandemic shut down so much business, was too much. BP slashed its dividend by 35%.” In his article, Guilfoyle mentioned that BP has begun to return more cash to shareholders, saying, “The firm also committed to returning at least 60% of surplus cash flow (define surplus) to shareholders through share repurchases, using the rest to work on the balance sheet. The firm felt this was necessary as it launched a $500 million repurchase program in order to offset the dilutive impact of the vesting of awards made to employees.”
However, this news was actually upsetting to a lot of income oriented investors because instead of the dividend that they’d become used to receiving over the years, seeing BP buy back shares to essentially cover the cost of management share-based compensation was not viewed as a shareholder friendly move. The fact is, BP’s dividend cut during the COVID-19 recession caused a lot of investors to lose faith in this big integrated name. Traditional oil/gas investors continue to question the company’s stark shift towards a focus on renewables; however, others applaud the company’s forward thinking mindset. However, at this point, the sentiment amongst the blue chip (4 and 5-star rated) analysts that the Nobias algorithm tracks is clear.
Since the beginning of May, we’ve seen 17 reports published by BP by such analysts and 14 of them offer bullish outlooks. These 14 “Buy” ratings were counterweighted by just 3 “Sell” opinions. BP shares are up more than 33.7% year-to-date as oil markets recover. And, the strong bullish lean amongst the Nobias analyst community appears to point towards more upside ahead for this transitioning oil giant.
Disclosure: Nicholas Ward has no position in BP. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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