BP (BP) is a British multinational oil and gas giant.
The company operates throughout its value chain, but its major projects are focused on the production of conventional and dry gas, LNG, and deepwater and conventional oil.
I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Strong Upstream Operations
Companies with a presence in the upstream part of their industry value chains are least likely to get affected by inflationary pressure.
BP’s portfolio of upstream projects is doing well, and is reaching record production numbers. For strategic alignment, the company still uses 2015 as its base portfolio, and is well on track to produce a surplus of 900,000 barrels of oil per day in 2021.
In combination with increased production, heavy and light oil prices have doubled over the past 12 months, and there’s no sign of them slowing down.
If production stays on par and prices remain at elevated levels, BP’s investors could benefit for a prolonged period of time.
India’s Downstream Opportunities
BP is a vertically integrated firm and holds middle and downstream assets in addition to its upstream projects.
An overlooked play with huge potential is the firm’s recent joint venture with Reliance Industries in India. BP contributed $1 billion in capital in 2019 to buy a stake in over 1,400 petrol pumps.
In addition, the two firms are also working together on the KG-D6 block with the vision of supplying 15% of India’s natural gas.
The pandemic has factored out the potential of the downstream operation up until recently, and it’s likely only after the re-opening phases where BP’s financial statements will see the true benefits of this joint venture.
Key Metrics
With a PE ratio of 11.6, a forward PE of 7.1, and a PEG ratio of 0.2, it’s safe to conclude that we’re looking at an undervalued stock based on its balance sheet and growth trajectories.
Critical ratios to look at when analyzing an oil and gas company are its price-to-book and interest coverage ratios due to the tangible nature of the firm’s assets, and its large reinvestment requirements, which could dilute investors at times.
BP’s price-to-book currently trades at a 27.5% discount to its sector, and its interest coverage of 2.58 means its debt can get repaid comfortably. Investors thus have plenty of residual to look forward to.
From a dividend perspective, BP is in great shape. A yield of 4.2% is accompanied by a dividend coverage ratio of 2.7, meaning that dividends per share are attractive, and likely to increase with time.
Wall Street’s Take
Wall Street analysts are positive about BP’s prospects with a Moderate Buy consensus rating. The average BP price target of $33.25 implies 12.1% upside.
There have been three Buy ratings on the stock, two Hold ratings, and no Sell ratings assigned in the past three months.
Concluding Thoughts
BP stock looks primed for growth due to its exploitation of the entire value chain, and especially its strength at the upstream part thereof.
The stock is currently undervalued according to key metrics, and dividend payouts remain solid.
Disclosure: At the time of publication, Steve Gray Booyens had a long position in BP.
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