BP Earnings: Favorable Market and Execution on Priorities Deliver Strong Results

Key Morningstar Metrics for BP

• Fair Value Estimate
  : $46.70
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : None
• Morningstar Uncertainty Rating
  : High

What We Thought of BP’s Earnings

BP’s BP third-quarter earnings exceeded market expectations. Much wider refining margins and stronger gas marketing and trading results drove earnings higher from the second quarter. BP made progress with its previously announced key priorities, most notably debt reduction.

Why it matters: A rising tide of favorable market conditions is lifting earnings for all boats in the third quarter, but for BP, the key issues remain executing its turnaround and reducing debt. Here, the earnings and quarterly update show progress. Despite higher cash flow and lower debt, management announced no repurchases, demonstrating its seriousness about reducing leverage.

• Net debt fell to $13.9 billion, below the $14.0 billion-$18.0 billion year-end target. However, management is focused on reducing its total financial leverage ratio, which includes hybrids and its Gulf of Mexico settlement, and management says it’s still too high.
• BP also made progress on simplifying the portfolio in the quarter, announcing and completing several divestitures. Operational improvement showed up in production uptime, production costs, refining costs, and refining availability.

The bottom line: Our no moat rating and GBX 590/$46.70 fair value estimates are unchanged, leaving shares fully valued. Our fair value incorporates the latest futures pricing, but assumes a moderation over the next few years to our midcycle price of $65/barrel.

Coming up: New CEO Meg O’Neill laid out her five priorities last quarter and provided updates this quarter. The focus on simplification and debt reduction is welcome. On Dec. 15, the new management team will hold a full strategy and outlook update.

• We don’t expect anything to change from what they’ve announced so far, but they will likely offer a longer-term view of the business and financial targets, which should further bolster confidence in BP’s turnaround story by reiterating the current message and showing that BP remains headed in the right direction.