BP Faces Price Forecast Cuts As Analysts Flag Weak Earnings And Rising Debt Challenges

Analysts cut the price target on BP p.l.c. BP following the company’s third quarter results reported on Tuesday.

BP’s revenue fell short at $47.25 billion, below the $52.56 billion consensus, with oil production down 6% year over year.

For FY24, BP continues to expect both reported and underlying upstream production to be slightly higher than the prior year. 

Meanwhile, the company continues to expect $25 billion of divestments and other proceeds from the second half of 2020 through 2025.

RBC Capital Markets analyst Biraj Borkhataria lowered the price target to 480p (from 525p) while reiterating the Sector Perform rating.

The analyst writes that BP faced significant challenges lately, and without an improving macroeconomic environment, they believe the investment case remains weak.

The company appears to have missed an opportunity in 2022-23, a peak period in the cycle, to significantly reduce its leverage, adds the analyst.

Borkhataria says that this oversight has left its distribution program less resilient compared to its peers.

The analyst observed a stronger focus on the balance sheet this quarter compared to previous periods, with net debt increasing from $33.3 billion to $35.3 billion (including leases).

Borkhataria expects this figure to rise to approximately $40 billion by the end of the year.

The analyst says that BP requires a reset of expectations ahead of its February 2025 Capital Markets Day (CMD).

Adjusting the ‘surplus’ payout ratio seems prudent, and the analyst believes it would be wise to allocate more cash towards strengthening the balance sheet.

Given the lackluster returns in recent years, Borkhataria thinks that prioritizing de-leveraging over growth capital expenditures in the transition engines should be the focus.

The analyst’s revised EPS estimates reflect a decrease of 6% for 2024 and 10% for 2025, primarily due to lower refining earnings, partially balanced by increased contributions from gas and low-carbon initiatives.

Goldman Sachs analyst Michele Della Vigna reduced the price target to 560p from 580p while reaffirming the Buy rating. Also, the analyst reduced the ADR price target to $44.0 from $46.0.

The analyst anticipates lower oil and gas price realizations than expected, particularly for European gas, which may result in diminished earnings and cash flow generation.

Additionally, lower-than-expected recovery rates in mature offshore oil and gas fields could lead to higher decline rates than currently projected, ultimately resulting in lower production growth and cash flow than their current estimates, adds the analyst.

Vigna adjusted the estimates, resulting in EPS changes of approximately -2%, -7%, and -5% for 2024, 2025, and 2026, respectively, primarily due to lower refining margins and reduced oil trading profits.

Price Action: BP shares are down 0.66% at $29.17 at the last check Wednesday.

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