BP (BP.L)
BP after Macondo - what next?
Where next: We revisit BP’s investment case and focus on the value drivers
outside Macondo. We retain our Outperform rating mainly on valuation
grounds, with a trimmed TP of 540p/$51/ADR offering 37% potential
upside. After recent underperformance, we see BP’s current share price as
attractive on a 12-month view. Investors have been frustrated by lack of
newsflow on Macondo and the absence of visible earnings recovery, but we
believe both elements are now finally within reach.
Investment Case: (1) BP's volume growth in the next 2-3 years will be
sluggish at <1% p.a on our estimates, but we think the market is not giving
BP credit for its stronger cashflow growth from recovery in high-margin
regions (notably the GoM) and margin-accretive new barrels. After 2 years of
transition, positive momentum should return in 2H12E. (2) We think BP has
the portfolio depth (especially in deepwater) to support production growth of
2.5-3% p.a. to 2020E. Nevertheless, we would not rule out BP buying assets
to plug portfolio gaps e.g. in LNG. (3) Capex should rise from $22bn to
$26bn by mid-decade to fund this growth; but higher spend still leaves room
to raise shareholder returns. (4) We would view BP largely halting its asset
disposal plan as positive, as we expect no re-rating from future asset sales.
Catalysts: (1) Inflection point in earnings in 2H12, (2) CWA settlement in
late 2012/early 2013, a scenario we estimate could initially add 5-6% to the
share price followed by further re-rating, (3) Dividend hike (to a competitive
5.8% yield) plus buybacks, after a CWA settlement. We would not usually
advocate buybacks, but think they could make sense for BP given excess
FC generation (once Macondo is resolved) and slow growth.
Valuation: BP is trading at a 35% discount to NAV, one of the largest in the
sector. It is now looking cheap on multiples, with a 23% discount on P/E (vs
10% premium before Macondo) and 14% on EV/CF in 2013E vs peers.
37 pages and 49 figures in pdf format.
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