- BP has an impressive portfolio of assets. The company has recently increased its dividend pushing its dividends to more than 8%. At the same time, it's utilized repurchases.
- Going forward, BP expects significant cash flow expansion from both its upstream and downstream segments, even at a mere $55/barrel.
- The company is investing in its renewable portfolio outside of the upstream and downstream segments. All of this together will position the company well for the future.
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BP (NYSE: NYSE:BP) is a more than $100 billion oil major. The company has had a tough decade and a half to say the least. The company faced the 2008 crisis followed by the Deepwater Horizon oil spill. After this, the 2014 oil crash started, and most recently, we’ve had COVID-19 fears. However, through all this, BP has continued to execute on its goals, and as we’ll see, it has the potential for significant shareholder rewards.
BP generated strong 2019 results, results that define the company’s continued abilities during a transition.
BP generated $10 billion in underlying replacement cost profit and $28.2 billion in underlying operating cash flow. I’m personally not a fan of all the fancy terms, however, when looking at investing in these companies, it’s important to know what all of these terms mean. Underlying replacement cost profit is effectively how much profit did the company make when you account for replacing the utilized reserves.
The company has continued to invest heavily in its business, and has earned an 8.9% ROACE. At the same time, the company spent $8.5 billion on dividends and share buybacks. The vast majority of this is on dividends, which have recently hit more than 8% as the company’s share price has collapsed from the crash.
Simultaneously, BP has continued to execute on its goals. The company has had a number of major project start-ups and FIDs. It’s also continued to perform on its BPX Energy acquisition. BPX Energy is BP’s first major acquisition in a number of years. It was a $10.5 billion acquisition of BHP’s shale assets made at an opportune time as BHP has sought to focus on mining.
The last aspect of BP’s accomplishments was its focus on the energy transition. We’ll discuss this in more detail later in the article, but it’s something important to pay attention to.
BP Cash - BP Investor Presentation
One quick aspect of the company’s recent highlights I want to dive into more detail about is cash. At the end of the day, businesses can come up with a variety of fancy terms to describe the cash that comes in and the cash that goes out. However, at the end of the day, what’s worth paying attention to is the balance sheet. How much cash is the company earning and spending.
The company, in 2019, had ~$28 billion of capital coming into the business. Out of this, it spent ~$16 billion on organic capital spending and ~$2 billion more on lease payments. The company also spent $7 billion on dividends and almost $2 billion on share buybacks. As a result, given the company’s $107 billion market capitalization, there are some important things worth paying attention to.
The first is that the cash coming in and going out of the business is significant relative to its size. The company is a $107 billion company with nearly $30 billion entering the business. That enables the shareholders and the investments to be large. The company is investing more than 15% of its market capitalization in capital spending along with nearly 10% in dividends and share buybacks.
More so, the company has some diversification benefits from its stake in Rosneft, with a 20% stake in the company. That stake provides more than $500 million in annual dividends and an investment worth ~12-13% of BP’s market capitalization that’s liquid. One last thing worth noting is that BP continues to face Gulf of Mexico expenses.
That expense will continue for a number of additional years, the total cost from the disaster is estimated at $65 billion (~60% of the company’s market capitalization). However, when it concludes, the company will be able to increase shareholder returns by near double digits with this saved capital.
As was evident from the cash inflow and outflow above, which actually increased from 2018-2019, BP should have an equally strong 2020 with the ability to generate similar shareholder rewards.
BP 2020 Guidance - BP Investor Presentation
BP is one of the few companies expecting upstream production to drop from 2019-2020. A substantial portion of this will be Rosneft production declines as a result of negotiations with BP, while the rest will be divestments. The company expects that capital expenditures will stay in line with 2019 at significantly nearly 15% of the company’s market capitalization.
There is a bright side here that’s worth paying attention to. The company expects <$1 billion in Gulf of Mexico oil spill payments down from $2.4 billion in 2019. That’s $1.4 billion more, equivalent to an increase in available shareholder rewards of more than 10%. That’s significant and it highlights the potential for the company to generate shareholder returns just as oil spill payments decrease.
Upstream And Downstream Portfolio
However, with all of this said, BP is calling 2020 a transition year with likely lower income than 2019. On the bright side, there’s little chance of a dividend cut, and the majority of the company’s shareholder returns come from this, so expect returns to remain strong. On the flip side, BP might choose to slow down share repurchases to preserve cash.
BP Upstream - BP Investor Presentation
The company expects a number of major projects to start up, with significant additional production (250 kbpd) coming in 2021 from these projects. Simultaneously, the company expects lower development cost and greater cash margins. The company expects all of this transition together to lead to ~$14-15 billion pre-tax FCF. Interestingly enough, these predictions are at $55 Brent ~8% above current prices.
However, these predictions are also at more than 10% below pre-COVID-19 prices. That means, should the effects of the virus disappear, the company could actually have significantly higher FCF than anticipated. At its production, a $5/barrel increase in Brent crude prices would be a near $4 billion/year increase in pre-tax cash flow. The 40% estimated tax rate is significant, but that’s still a respectable amount of cash.
BP Downstream - BP Investor Presentation
BP’s downstream sector is also focused on strong execution. The company’s pretax earnings and free cash flow have both grown here over the past several years. The company expects continued growth going forward, with around 50% growth in the company’s FCF. That growth in the FCF should help to balance the company’s overall earnings.
As is clear, BP has impressive upstream and downstream potential which should lead to strong shareholder rewards.
BP’s impressive portfolio of upstream and downstream assets will lead to the ability to generate significant future rewards for shareholders.
BP Future Guidance - BP Investor Presentation
BP has the ability to generate significant growth over the 2020-2021 time period that will result in more significant cash for shareholders. The company expects, again at $55/barrel which is a more pessimistic price than many other majors, that organic FCF per share will expand significantly to nearly 50% above 2019 levels. This will be supported by significant capital spending (~1% of the market cap/year).
Now, there are a few things worth noting here. The first is that the company has announced a “Progressive distribution policy.” However, it later stated that it plans to sustainably increase dividends after its most recent dividend increase. Given that the company’s dividend is one of the most important aspects of its shareholder returns, it’s important to keep a close eye on this.
Despite all of its potential, BP does have some risks which are worth paying attention to. The company’s two biggest risks are the risk of climate change along with the risk of poor execution on its capital spending.
The risk of climate change is one that’s already fairly understood, however, how it affects investors is currently less understood. There are a wide-ranging variety of proposals and BP is doing its best to do well by investing in renewables and other businesses. However, this is a risk that all investors need to face and potentially handle.
Another risk that the company potentially faces is the risk of poor execution on its capital spending. The company is spending a massive amount of capital, and its planned ongoing capital spending is ~$15-17 billion/year. That’s equivalent to ~15% of the company’s market capitalization on an annual basis, a significant amount, and good execution is required. Another disaster, like Deepwater Horizon, could devastate the company.
These are risks that investors should always pay attention to.
Now, with all of this said, BP is working for a different future by focusing on its renewables portfolio.
BP Renewables - BP Investor Presentation
BP is focused on expanding an exciting solar portfolio along with other forms of alternative energy like wind and biofuel. Solar and wind are expected to be two of the fastest-growing sources of power in the market from now until 2040 and BP is aiming to play a significant role in this. The company has billions in available capital here that it’s investing.
Personally, I’m a big fan of the potential things to come from the company’s renewables portfolio. The company has access to cheap capital along with an impressive business network with significant potential. These two things together will enable the company to rapidly gain a significant foothold in the renewables business. The company can utilize this foothold to diversify its business and reward shareholders.
BP is a quality oil company with a significant amount of potential. The company has a secure dividend yield of more than 8%, one that it has raised recently, and one that it could continue raising going forward. The company has also spent a significant amount on capital spending to the tune of $15-17 billion/year while still having some leftover to repurchase shares.
For interested investors, I recommend investing in BP for the long term. The company is working to diversify its portfolio and investing in renewables. The company is working on growing the cash flow from existing assets together. And all of this, put together, will mean the potential for significant long-term rewards for shareholders.
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This article was written by
The Value Portfolio specializes in building retirement portfolios and utilizes a fact-based research strategy to identify investments. This includes extensive readings of 10Ks, analyst commentary, market reports, and investor presentations. He invests real money in the stocks he recommends.He is the leader of the investing group The Retirement Forum with features including: model portfolios, macro overviews, in-depth company analysis and retirement planning information. Learn more.
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.
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