Company Reports

BP remains committed to investing and growing its nonhydrocarbon businesses as it seeks to transition to an integrated energy company from an integrated oil company. However, it has revised its previous plans to reduce production by 25% by 2025 and 40% by 2030, and will now increase production slightly through 2025 and reduce it by about 25% from 2019 levels by 2030, largely through divestments. During that time, it should also improve upstream profitability as higher-margin volumes from major projects come online and costs are reduced. Shareholders should welcome this change in our view given the improved outlook for oil and gas prices.

BP's fourth-quarter earnings slightly exceeded market expectations even as they fell from the year before, due to lower oil and gas prices and weaker refining margins. Trading was a mixed bag with oil trading weaker but gas and marketing trading results stronger than last year. Underlying replacement cost profit fell to $3.0 billion from $4.8 billion a year ago while operating cash flow fell to $9.4 billion from $13.6 billion the year before. Production increased 2.4% to 2,320 barrels of oil equivalent per day from the year before as strong bpx performance offset lower gas volumes from natural decline in Egypt. Production grew 2.6% for the full year and management expects slightly higher volumes in 2024. Our fair value estimate and moat rating are unchanged.

BP announced interim CEO Murray Auchincloss would assume the role permanently, effective immediately. The announcement ends the recruitment process that began in September 2023 after Bernard Looney resigned as CEO after not disclosing previous personal relationships with colleagues at BP.

BP's third-quarter earnings fell from the year before, while failing to meet market expectations, primarily due to lower oil and gas prices and weak gas and marketing trading results. Underlying replacement cost profit fell to $3.3 billion from $8.2 billion a year ago while operating cash flow increased to $8.7 billion from $8.3 billion the year before, due to working capital effects. Production increased 1.3% to 2,328 barrels of oil equivalent per day from the year before. BP repurchased $2.0 billion in shares during the quarter, including its $1.5 billion program announced last quarter as well as additional repurchases to offset dilution. Management will maintain the $1.5 billion repurchase rate in the fourth quarter. Gearing fell to 20% during the quarter but remains at the upper end of the peer group range.

ExxonMobil confirmed prior Wall Street Journal news reports by announcing on Oct. 11 its intention to acquire narrow-moat Pioneer Natural Resources in an all-stock transaction valued at $59.5 billion or $253 per share, based on ExxonMobil’s closing price on Oct 5. ExxonMobil shares have been slightly lower since then, implying a per-share value of about $247 based on ExxonMobil’s closing price on Oct. 11 and the exchange ratio of 2.3234 for every one Pioneer share. That is a 22% premium to our Pioneer fair value estimate of $203 per share, which assumes a long-term oil price of $60/barrel. This suggests a modest reduction in our fair value estimate for ExxonMobil once the deal is considered, but that is largely offset by higher oil prices since our last update as well as value assigned to synergies, which nets out leaving our fair value estimate unchanged. The acquisition price implies a long-term oil price of about $70/bbl, which we don't consider unreasonable, suggesting the valuation for Pioneer, while above our fair value estimate, is fair. We see no impediments to the deal closing in first-half 2024 as expected.

BP CEO Bernard Looney has resigned effective immediately after failing to fully disclose previous personal relationships with company colleagues. CFO Murray Auchincloss will step in as CEO on an interim basis.

BP previously expected to reduce production by 25% by 2025 and 40% by 2030, but it will now increase production slightly through 2025 and reduce it by about 25% from 2019 levels by 2030, largely through divestments. During that time, it should also improve upstream profitability as higher-margin volumes from major projects come online and costs are reduced.

BP's second-quarter earnings fell from the year before, as well as falling short of market expectations on lower oil and gas prices, narrower refining margins, and mixed trading results. Underlying replacement cost profit fell to $2.6 billion from $8.5 billion a year ago while operating cash flow fell to $6.3 billion from $10.9 billion the year before. Production increased 3.4% to 2,272 thousand barrels of oil equivalent per day from the year before, while management now expects full-year 2023 volumes to be higher than in 2022 as opposed to flat previously.

BP's first-quarter earnings fell from the year before although this exceeded market expectations; a stronger refining performance was unable to offset the impact of lower oil and gas prices. Underlying replacement cost profit fell to $5.0 billion from $6.2 billion a year ago while operating cash flow fell to $7.6 billion from $8.2 billion a year before. BP’s trading contribution was a mixed bag as well, as gas and marketing delivered an “exceptional” result while oil trading delivered a “very strong” result, but that was weaker than the “exceptional” result a year before. Production increased 3.4% to 2,330 mboe/d from the year before, but management expects full-year 2023 volumes to be broadly flat with 2022.

BP previously expected to reduce production by 25% by 2025 and 40% by 2030, but it will now increase production slightly through 2025 and reduce it by about 25% from 2019 levels by 2030, largely through divestments. During that time, it should also improve upstream profitability as higher-margin volumes from major projects come online and costs are reduced.

BP announced fourth-quarter earnings that exceeded market expectations, but the rally in shares was more likely attributable to the strategic course modifications management announced with the earnings release. The market was most likely celebrating the announced increase in investment in oil and gas and increase in BP’s long-term production targets that imply its 2030 production levels will be higher than previously guided, although still declining, but with growth through 2025. Combined with an increase in investment in its energy transition plays, BP also revised its expected 2030 earnings target higher and reiterated its cash-return framework. The latter should allay any fears over capital discipline or that investments will reduce payouts.

BP is transitioning from an integrated oil company to an integrated energy company to achieve its emission reduction targets and position itself for the energy transition while growing earnings and improving returns.

BP's third-quarter adjusted earnings of $8.2 billion exceeded market expectations while only slipping slightly from second-quarter levels and increasing from $3.3 billion last year on higher commodity prices and strong refining margins. Adjusted earnings excluded about $10.1 billion in losses primarily due to fair value accounting on liquid natural gas contract hedges.

Although the third quarter brought record earnings for Exxon and nearly a record for Chevron, including both exceeding market expectations, we do not plan any material increases to our fair value estimates. As a result, both trade at a premium of 9% and 21%, respectively.

BP is transitioning from an integrated oil company to an integrated energy company to achieve its emission reduction targets and position itself for the energy transition while growing earnings and improving returns.

After updating our fair value estimates for the no-moat European major integrated oils—BP (0.74 price to fair value), Shell (0.79), and TotalEnergies (0.76)—they continue to trade significant discounts to their narrow-moat U.S. counterparts Chevron (1.04) and Exxon (0.92). Outside of idiosyncratic company issues, the reason for the discount between the two groups is not entirely clear but is probably the result of a confluence of factors.

BP is transitioning from an integrated oil company to an integrated energy company to achieve its emission reduction targets and position itself for the energy transition while growing earnings and improving returns.

BP is transitioning from an integrated oil company to an integrated energy company to achieve its emission reduction targets and position itself for the energy transition while growing earnings and improving returns.

Following the trend of peers who have already reported, BP's second-quarter adjusted earnings exceeded market expectations at $8.5 billion compared with $2.8 billion a year ago largely on higher commodity prices and strong refining margins.

BP's first-quarter adjusted earnings exceeded market expectations at $6.2 billion compared with $2.6 billion a year ago largely on higher commodity prices. Adjusted earnings exclude post-tax charges of $24.4 billion related to the decision to exit the 19.75% holding in Rosneft. We previously incorporated this decision into our model and fair value estimate, assuming a value for BP’s Rosneft stake at $3.6 billion. If we mark it a zero, our fair value estimate falls by 3%, which we are likely to do with our next update given BP is assuming zero value. However, the ultimate realized value is likely to be greater, but unknown for some time. Regardless, BP looks undervalued currently. Our no moat rating is unchanged.