Expansion Into Cascadia And Tangguh Will Boost Future Operational Efficiency

Key Takeaways

• Strategic projects and geographical expansion in key markets aim to drive revenue growth and enhance BP’s operational footprint.
  
• Ongoing cost reduction and a capital-light approach target improved margins and higher earnings through optimized capital allocation and increased efficiency.
  
• BP faces challenges from refining margin issues, transitions to a capital-light strategy, geopolitical complexities in Russia, and tariff uncertainties affecting revenue and profit margins.

Catalysts

An integrated energy company, provides carbon products and services.

• BP is pursuing strategic actions to reshape its portfolio through final investment decisions (FIDs) on 10 new projects, including major developments in Cascadia and Tangguh, and expanding access to Iraq and India. These moves are expected to contribute to future revenue growth by expanding its geographical and operational footprint.
  
• The company is working to improve its refining business through enhanced plant reliability and commercial optimization, targeting a 96% reliability goal. These efforts should help increase net margins by reducing outages and improving operational efficiency.
  
• BP is focusing on cost reduction strategies, aiming for $750 million in structural cash cost savings. These reductions are expected to improve net margins by lowering operational expenses.
  
• The company's strategic shift to a capital-light approach, including joint ventures like JERA Nex BP, is anticipated to reduce capital expenditure and enhance returns, increasing earnings by optimizing capital allocation.
  
• BP’s continued investment in high-return projects in upstream operations, such as the Kirkuk redevelopment, aims to increase production without significant capital input, potentially boosting revenue and driving higher earnings through increased efficiency.

BP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BP's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.2% today to 5.1% in 3 years time.
• Analysts expect earnings to reach $9.3 billion (and earnings per share of $0.67) by about March 2028, up from $390.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $13.9 billion in earnings, and the most bearish expecting $6.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, down from 217.8x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 8.6x.
• Analysts expect the number of shares outstanding to decline by 5.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.8%, as per the Simply Wall St company report.

BP Future Earnings Per Share Growth

Risks

• BP has faced a challenging year for refining due to industry-wide margin and pricing issues, which could negatively impact earnings.
  
• The company has been affected by weak biofuels margins and a trucking recession impacting TA, possibly leading to lower profit margins.
  
• There is uncertainty regarding the impact of U.S. tariffs on Canadian crude, which could affect refining margins and revenue stability.
  
• The transition to a more capital-light strategy, while potentially beneficial in the long term, may initially lead to reduced control over certain assets, affecting revenue and margins.
  
• Ongoing geopolitical and financial complexities related to BP's stake in Rosneft and its Russian operations could impact future revenue and cash flows if the divestment strategy encounters issues.

Valuation

• The analysts have a consensus price target of £4.897 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 £6.48, and the most bearish reporting a price target of just £4.21.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $182.5 billion, earnings will come to $9.3 billion, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of £4.12, the analyst price target of £4.9 is 15.9% 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.