Completion Of Eight Biogas Plants And New Assets In Iraq Will Strengthen Future Prospects

Key Takeaways

• BP's strategic optimization and divestment of non-competitive assets aim to enhance capital allocation, improving net margins and long-term earnings.
  
• Strong potential for revenue growth from expanded upstream assets and significant gains in the renewable energy sector.
  
• Underperformance in liquids trading, high debt levels, and uncertain investments in renewables may impact BP's profitability and revenue stability amidst market challenges.

Catalysts

Provides carbon products and services.

• BP's commitment to cost savings is expected to drive future earnings growth, with ongoing actions to deliver over $0.5 billion of cost savings in 2025 and a target of at least $2 billion by the end of 2026, potentially improving net margins.
  
• The expansion and commissioning of upstream assets, such as the completion of 8 biogas plants, and progress on projects like Cascadia, indicates strong potential for revenue growth from increased production capacity.
  
• BP's focus on high-grading its portfolio by pausing or stopping 24 projects and divesting non-competitive assets is expected to optimize capital allocation, leading to better net margins and earnings in the long term.
  
• The ongoing growth in BP's EV charging business, with reported 80% year-on-year growth, and the sale of 1 terawatt hour of electrons, highlights increasing revenue potential from the growth in renewable energy sectors.
  
• BP's strategic reinforcement of its asset base in key regions, such as new resource opportunities in Iraq, Azerbaijan, and Abu Dhabi, presents future cash flow generation potential, strengthening overall revenue streams.

BP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BP's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.4% today to 5.0% in 3 years time.
• Analysts expect earnings to reach $9.8 billion (and earnings per share of $0.7) by about February 2028, up from $2.7 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $12.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, down from 31.0x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 9.9x.
• Analysts expect the number of shares outstanding to decline by 2.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.31%, as per the Simply Wall St company report.

BP Future Earnings Per Share Growth

Risks

• The underperformance in the liquids trading division, particularly with two successive weak quarters, could negatively impact downstream earnings and overall profitability if market conditions do not improve.
  
• The divestment strategy, while aimed at high-grading the portfolio, may lead to reduced upstream volume, potentially impacting future revenue streams if not successfully counterbalanced with high-margin projects.
  
• The high level of debt consolidation, particularly due to recent acquisitions, could strain the balance sheet and limit financial flexibility, affecting net margins if not managed with strategic divestitures or equity partnerships.
  
• The timeline and efficacy of heavy investments into transition growth engines like renewables and biogas remain uncertain, posing risks to expected cash flow improvements and impacting long-term earnings if hurdles persist.
  
• Competitive pressures and evolving market conditions in areas like U.S. natural gas pricing and refining margins in Europe could dampen the ability to sustain cash flow and profitability at projected levels, challenging revenue stability.

Valuation

• The analysts have a consensus price target of £4.827 for BP based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £6.37, and the most bearish reporting a price target of just £4.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $196.4 billion, earnings will come to $9.8 billion, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of £4.33, the analyst price target of £4.83 is 10.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.