BP: Riding The Oil Wave Higher

Summary

• BP's share price is trading higher.
• Its fundamentals are strengthening.
• I am buying stock in the name.

BP (NYSE:BP) is seeing its share price trade higher as its fundamentals improve. Its share price has traded lower over the last decade due to heightened equity market volatility during the financial crisis, then a collapse in the price of oil. Management has put together a strong, globally diversified portfolio that is leveraged to rising oil prices. As the company's macroeconomic environment improves, expect its share price to similar follow higher.

Price Action

Over the last decade, BP's share price has fallen for a number of reasons. First, equity market declines during the financial crisis, then further European selling during the Greek Debt Crisis, weighed on investor sentiment in the oil giant. Additionally, a collapsing oil price from 2014-2016 led to further declines in the company's share price.

Along the way however, BP's portfolio of assets has continued to deliver steady growth, becoming more efficient and flexible to combat oil price declines. Its share price currently trades at roughly half of its mid-2000's levels, and looks to be forming a bottoming pattern. With BP leveraged to the upside for rising oil prices, even stability at these relatively elevated oil prices should lead to increasing investor sentiment as fundamentals further improve. I am buying stock in the name as its share price benefits from a more bullish macroeconomic environment.

Fundamental Narrative

BP looks like an attractive buy at current levels as its diversified portfolio is generating strong performance amid rising energy prices, leading to organic cash flow generation. The company's current portfolio is diversified globally, with the flexibility to navigate the constant change seen in energy markets, according to recent earnings calls.

In the Upstream, BP is growing its gas in an advantaged oil portfolio, with assets that are low cost or high margin, and is also building on an already deep resource base. Including its equity production in Russia, BP is producing 3.6 million barrel per day, with an estimated 18.4 billion barrels of proven oil equivalent reserves, providing them with a massive 13.7 years of reserve life.

Across its total Upstream resource base of 48 billion barrels, they have sufficient opportunities to deliver quality growth through the next decade and beyond without the need for acquisitions or further exploration, according to management. Roughly two-thirds of its portfolio is leveraged to price, either through direct or indirect oil and gas indexation. This is balanced however, with production from fixed price or similar contracts, which provide a base of steady, resilient long-term cash flow. Rising energy prices have thus been a positive for the company's fundamentals.

Additionally, BP has a strong and differentiated Downstream business. It covers marketing, manufacturing, and its integrated supply and trading function, creating an integrated and value optimized business.

In recent quarters, BP has seen strong growth in its Downstream lines. 2017 was one of its best years in its history in terms of earnings, with its marketing and manufacturing businesses together delivering around $1 billion of underlying earnings improvement during the year, according to management.

This has been achieved through continued volume growth in premium fuels and lubricants; the strong performance of its refining operations, averaging more than 95% availability across the year; and earnings growth of over 10% in fuels marketing. BP has around 1,100 retail convenience partnership sites around the world, with plans to continue to grow its retail network across existing markets as well as fast-growing new markets, such as India, Indonesia, Mexico, and China.

Management is also bullish on the future price of oil, expecting the continuation of elevated prices, which should aid its top- and bottom-line performance. Brent's oil price has averaged almost $70 per barrel in 2018, up from an average of $54 in 2017. The gradual decline in inventories over the past six months, together with heightened geopolitical uncertainty, has driven prices up, according to management. Management also had this to say about energy prices:

"In terms of outlook, the base case of our 2017 energy outlook expects that global energy demand will grow. It will grow by up around a third over the next two decades. Virtually all of that demand is to come from emerging economies, notably China and India, driven by rising prosperity. And the rate of growth will then slow down compared to past decades, as the energy transition evolves. And there's increasing attention on energy sustainability and efficiency."

And

"On the supply side, there is a shift to an abundance of resources with natural gas growing faster than both coal and oil. Oil demand continuing to grow over the next 20 years or so with the prospect of a plateau further out. And renewables growing faster than any other fuel but from a low base."

Below is a chart of BP's revenue and earnings per share. In recent years, both earnings and revenue have collapsed alongside falling energy prices. The company has managed to run in an efficient manner however, and is now seeing fundamentals turn higher alongside rising oil prices. Although energy prices do not necessarily need to continue higher at its recent pace, stable, elevated prices should continue to benefit margins, and thus bottom-line growth.

Strong underlying performance and management's confidence in growing organic free cash flow led to a share buyback program in the fourth quarter of 2017. Buying back shares through the fourth quarter offset the scrip dividend issued in September, or the drip in the U.S., and that commitment remains, according to its recent earnings call.

Conclusion

BP is seeing its share price trade higher as its fundamentals improve. Its share price has traded lower over the last decade due to heightened equity market volatility during the financial crisis, then a collapse in the price of oil. Management has put together a strong, globally diversified portfolio that is leveraged to rising oil prices. As the company's macroeconomic environment improves, expect its share price to similar follow higher.

Analyst’s Disclosure: I am/we are long BP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.