BP's New CEO Faces Many Challenges In Complex Company

A positive industry outlook supports our buy rating on BP plc (BP) stock despite a lowering of estimated net present value [NPV] to $75 a share from $87 a share. On the basis of third quarter results reported today we project lower unlevered cash flow (Ebitda) relative to revenue from oil and gas production.

We also project lower downstream results as we use the latest twelve months as the indicator for the next twelve months. Lower cash flow translates to lower NPV to keep unlevered cash flow multiple (EV/Ebitda) in line with that for peer companies considering adjusted reserve life. The good news is that NPV has appreciation potential as it is tied to oil at $66 a barrel compared to the six-year quote of $77 on a rising trend.

Meanwhile, new Chief Executive Tony Hayward faces many challenges in a large and complex organization recovering from a string of operating difficulties, from production in Alaska to refining in Texas. Finally, the stock is returning about 7.5% a year to shareholders counting share repurchase at about 4% a year and cash dividend of 3.5%.

Originally published on October 23, 2007.

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