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BP Plc – Updating Trading Guidance and Price Target – 04 August 2014

 


Company Overview:

Founded in 1908, BP Plc (British Petroleum) is one of the world’s largest oil and gas companies. It operates under two business units: Exploration and Production followed by Refining and Marketing.

Worldwide, BP pumps 3.2 million barrels of oil equivalent per day, employs 83,900 people and has 17.9 billion barrels of oil equivalent in proven reserves. It also owns and operates 14 refineries as well as 17,800 retail sites (petrol stations) across the globe.

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First Half results for BP Plc Meet with a Mixed Reaction from Investors

Following a quarter which saw BP Plc shares reach a four-year high, on an improving earnings outlook and hopes that the worst of the Deepwater Horizon (DWH) costs were behind it,  the group’s H1 results met with a mixed reaction from investors.

After an initial jump, the shares sank to trade as low as 477.00 pence during the closing hours of the week as investors weighed the risks presented by tightening sanctions on Russia and the prospect of further DWH litigation costs against continued investment in the group.

Over the period, BP made progress across a number of metrics. Here management announced the completion of its $8 billion share buyback programme before declaring that the board had agreed upon $3.8 billion out of a scheduled $10 billion of divestment to take place before end 2015.

In addition to shareholder returns, the post-tax dividend that BP receives from Rosneft was also substantially higher, at $690 million, than in both Q1 2014 as well as in H1 2013.  

At the operational level, BP Plc made two “significant” discoveries over the period and announced that it has also brought online five new “major” upstream (extraction) projects in key geographies.

All in all, Q2 profits were up 34% on the same period a year ago although for H1 as a whole, profits were lower than in the first half of 2013.

In addition to this, management expect Q3 earnings to be lower than in the most recent quarter as a number of high margin businesses in Alaska and the Gulf of Mexico go offline for seasonal maintenance.

Despite the downer for Q3, full year guidance was largely positive, and management remain confident of delivering higher free cash flows ($31 billion) and underlying earnings for 2014. Management also remain confident in their ability to further increase the full year dividend, which already increased by 8% in the first quarter.

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The Rub

However, even with a better earnings outlook and management’s pledge to continue returning more cash to shareholders, the current environment (geopolitical) is not conducive to higher levels for BP shares.

With an end to the crisis in Ukraine far from visible on the horizon, the primary risk facing the group is that sanctions against Russia could tighten drastically over the months ahead and western companies with operations in Russia could bear the brunt of any retaliation from Moscow.

Given BP’s substantial stake in Rosneft, the state-owned oil giant that accounts for 28% of production, the group is disproportionately exposed to this risk.  

Consequently, we see further upside to BP.L (^520.00) as unlikely over the months ahead. For this reason, we now see the shares biased toward the downside, with strong support at 440.00 pence and any gains over the near term capped at 515.00 pence. 

Should a peaceful and sustainable resolution to the crisis in Ukraine be reached, and were sanctions against Russia to be eased, we would expect a positive performance from BP Plc. Under this scenario, our previous outlook applies. However, we view this as unlikely over the near to medium term.  

The next major event scheduled for BP Plc is the release of Q3 results on 23 October 2014. Accordingly, we shall review both the group’s performance as well as the shares at this time.

BP Plc Share Price Hourly Intervals

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IMPORTANT:
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