Upstream Discoveries and Capital Returns Will Influence Global Energy Markets Ahead

Key Takeaways

• Focused project execution, cost reduction, and technological innovation are set to enhance BP's margins and cash flow while positioning it for persistent global energy demand growth.
  
• Strategic asset optimization and strong trading performance support stable, high-margin earnings and resilience amid sector and regulatory shifts.
  
• Ongoing capital misallocation, portfolio complexity, and operational weaknesses threaten BP's progress on energy transition, efficiency gains, and long-term profitability.

Catalysts

An integrated energy company, provides carbon products and services.

• The ramp-up of major upstream projects, breakthrough exploration successes in Brazil, West Africa, and other regions, and an ongoing focus on high-return organic growth provide BP with the ability to capture persistent global energy demand growth-particularly from emerging markets-supporting visible revenue and earnings expansion.
  
• An accelerated and data-driven structural cost reduction program, enhanced by the use of AI, digitization, and supply chain optimization, is expected to materially improve BP's operating margins and free cash flow, positioning the company to benefit from technological advancements that reward scaled, efficient industry players.
  
• Portfolio high-grading and disciplined capital allocation-via active divestment of lower-quality or stranded assets and focus on best-in-class project returns-will streamline BP's asset base and support more stable, higher-margin earnings as carbon pricing and ESG pressures increase, consolidating the position of large incumbents.
  
• Superior performance in integrated trading (oil, gas, LNG) and downstream operations, including leveraging increasingly tight commodity and product markets, allows BP to maximize margin capture amid ongoing sector underinvestment, providing resilient ancillary income streams and diversification from core production.
  
• Sustained growth in U.S. upstream operations (including BPX Energy and Gulf of Mexico), combined with ongoing U.S. policy support and favorable tax frameworks, positions BP to tap into scalable, long-cycle projects with attractive capital returns, underpinning long-term improvements in profitability and cash generation.

BP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BP's revenue will decrease by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.3% today to 5.2% in 3 years time.
• Analysts expect earnings to reach $8.9 billion (and earnings per share of $0.61) by about September 2028, up from $562.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $10.7 billion in earnings, and the most bearish expecting $6.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, down from 157.9x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 11.5x.
• Analysts expect the number of shares outstanding to decline by 4.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.34%, as per the Simply Wall St company report.

BP Future Earnings Per Share Growth

Risks

• The recent impairments totaling $1.2 billion-including write-downs related to hydrogen, biofuels in Australia, and lingering issues in gas and low carbon-highlight continuing risks of capital misallocation and underperformance in new energy segments, which could negatively affect EPS and asset values.
  
• BP's divestment and portfolio review process, including uncertainty around the Castrol disposal and potentially complex lease obligations tied to future large projects (like Bumerangue in Brazil), could lead to lumpy cash flows, increased financing needs, or mismatched capital allocation that risks constraining free cash flow and future earnings.
  
• Tight diesel margins and underperformance in certain downstream segments (like TravelCenters of America) reveal areas of operational weakness and pricing pressure, which may dampen margin improvement targets if market conditions do not recover.
  
• Structural cost reduction efforts are partly offset by growth in underlying organizational expenses (including inflation, increased production, and acquisitions), raising execution risk that headline savings may not fully translate into improved net margins or bottom-line growth, especially if inflation persists.
  
• The heavy strategic focus and capex on upstream oil and gas development (ten major discoveries and multiple startups) may contradict long-term energy transition trends, exposing BP to long-term oil demand risks, evolving carbon regulations, technological obsolescence, and potentially stranded asset write-downs-threatening both top-line revenue and long-term profitability.

Valuation

• The analysts have a consensus price target of £4.438 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 £5.2, and the most bearish reporting a price target of just £3.82.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $172.2 billion, earnings will come to $8.9 billion, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 8.3%.
• Given the current share price of £4.27, the analyst price target of £4.44 is 3.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.