BP's Shares Decrease by 14% in 2023, What's the Future Hold?
With a 14% decrease in its share price this year, landing around $29 per share, we maintain that BP plc'sstock (NYSE: BP) has the potential for future growth. Despite the geopolitical turmoil that may potentially impact oil and gas prices, the U.S. Energy Information Administration foresees pricing stability in the coming years. BP's third-quarter performance mirrored the fall in oil prices, which dropped 17% due to worries about global demand. However, the company's strategic measures, which include share repurchases and the expansion of its low-carbon energy business, aim to generate cash and mitigate the impact of lower benchmark oil prices.
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BP's third-quarter results showcased its weakest quarterly performance since Q4 2020, largely due to the pandemic's impact on industry profitability. The company's replacement cost profit amounted to $2.3 billion in Q3 2024, surpassing analyst estimates of $2.1 billion. This result represented a decrease from the $2.8 billion net profit recorded in the second quarter of 2024 and the $3.3 billion net profit reported in Q3 2023. Revenues fell 11% year-over-year (y-o-y) to $47 billion, primarily due to lower product prices and crude, while Earnings per American Depository Share (ADS) declined 28% y-o-y to 83 cents. Furthermore, the company's net debt increased to $24.3 billion from $22.6 billion in the second quarter of 2024, mainly due to reduced operating cash flow, higher capital expenditures, and lower divestment and other proceeds.
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BP announced plans to initiate an additional $3.5 billion share repurchase program for the second half of 2024. This adds to the $1.75 billion share repurchase already completed in Q3'24 and supplements its initial $3.5 billion commitment for the first half of the fiscal year. The supplementary program represents approximately 3.5% of the company's current market capitalization, offering potential support to the stock price. Moreover, BP confirmed its intention to repurchase shares worth at least $14 billion by 2025, offering further benefits to shareholders.
BP expects both reported and underlying upstream production to be slightly higher in 2024 compared to 2023. The company expects underlying production from oil and operations to rise, while production from gas and low-carbon energy is predicted to fall. Capital expenditure, including inorganic capital expenditure, is expected to be around $16 billion in 2024. Additionally, BP expects divestment and other proceeds of over $3 billion in 2024. The company continues to anticipate achieving $25 billion in divestment and other proceeds between the second half of 2020 and 2025.
We forecast BP's revenues to be $200 billion for the fiscal year 2024, representing a 6% decline y-o-y. Given our revised revenue and EPS forecasts, we have revised the *BP Valuation* to $37 per share, based on a $3.67 expected EPS and a 10.1x P/E multiple for the fiscal year 2024. BP's stock appears inexpensive at the current levels, with our valuation representing a 28% premium from the current market price (Dec 30).
BP has been one of the few stocks to increase in value during each of the last 3 years, but its returns have not consistently outperformed the market. Returns for the stock amounted to 36% in 2021, 39% in 2022, and 6% in 2023. In contrast, the Trefis High-Quality Portfolio, comprising 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period, providing better returns with less risk. Why is that? The HQ Portfolio's stocks offered superior returns with less volatility compared to the benchmark index, as suggested by HQ Portfolio performance metrics.
Behind oil and gas production, BP also invests heavily in charging stations, biofuels, hydrogen fuels, and fueling stations. By 2023, more than 30% of the company's total spending was directed towards these businesses, marking an increase from 3% in 2019. Initially, the company demonstrated leadership in the energy sector by committing to achieving net-zero emissions by 2050 or earlier. However, the company revised its commitment, setting a goal to decrease its overall emissions by 35% to 40% by the end of the current decade. This revision signified a reassessment of the company's climate strategy, with a continued emphasis on investing in oil and gas operations to meet ongoing demand.
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Based on Trefis' analysis, BP's revenues are projected to be $200 billion for the fiscal year 2024, indicating a 6% decrease compared to the previous year. This forecast results in a revised valuation for BP's stock of $37 per share, representing a 28% premium from its current market price.
Despite the decline in BP's earnings per American Depository Share (ADS) by 28% year-over-year, Trefis' High-Quality Portfolio, which includes BP, has outperformed the S&P 500 every year since 2021, offering better returns with less risk.
