Improved Efficiency And Capacity Projects Will Shape Future Resilience

Key Takeaways

• Improvements in operational efficiency and cost management could boost BP's future revenue and net margins through better asset utilization.
  
• Strategic divestments and joint ventures may support capital investments, enhance financial stability, and improve shareholder returns.
  
• Weak performance in key segments and increased net debt amidst ongoing market volatility and high taxes could threaten BP's financial stability and growth prospects.

Catalysts

An integrated energy company, provides carbon products and services.

• BP's operational efficiency improvements, demonstrated by 96% refining availability and 95% upstream reliability, suggest an ability to increase future revenue and potentially net margins through better asset utilization and cost management.
  
• The successful start of three major projects, adding 100 mbd of capacity, positions BP to enhance its revenue growth as these contributions play a significant role in achieving the target of 250 mbd capacity by 2027.
  
• Substantial exploration successes, including a discovery in Namibia, could positively impact BP's revenue and earnings in the coming years by expanding their resource base and potential production capabilities.
  
• BP's strategic review and possible divestment of its Castrol business, coupled with interest in joint ventures like Lightsource BP, could provide cash inflow that would strengthen the balance sheet and support capital investment or shareholder returns.
  
• BP's alignment of capital expenditure with market conditions and ongoing cost reduction efforts, including a $500 million reduction in operating expenditure, should enhance net margins and create a more resilient financial structure to improve earnings stability.

BP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BP's revenue will decrease by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.6% today to 4.8% in 3 years time.
• Analysts expect earnings to reach $8.4 billion (and earnings per share of $0.61) by about May 2028, up from $-1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $11.5 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 12.0x on those 2028 earnings, up from -61.2x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 9.1x.
• Analysts expect the number of shares outstanding to decline by 5.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.91%, as per the Simply Wall St company report.

BP Future Earnings Per Share Growth

Risks

• The weak performance in BP's gas and low-carbon energy segments, particularly due to higher noncash costs and weak gas trading results, could negatively impact revenues and net margins.
  
• Ongoing market volatility and weak refining margins in certain regions could continue to affect BP’s top-line revenues and bottom-line earnings.
  
• BP’s increased net debt due to working capital build, despite expectations of unwinding, poses a risk if market conditions do not remain favorable, impacting overall financial stability.
  
• Continued high effective tax rates, especially in high-tax jurisdictions, could reduce net earnings and impact profitability forecasts.
  
• Potential reductions in CapEx due to macroeconomic uncertainties may compromise long-term growth prospects and future revenue streams.

Valuation

• The analysts have a consensus price target of £4.485 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 £6.52, and the most bearish reporting a price target of just £3.61.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $174.5 billion, earnings will come to $8.4 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of £3.5, the analyst price target of £4.49 is 21.9% 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.