Morningstar | BP. Updated Forecasts and Estimates from 27 Feb 2019
BP reported fourth-quarter results that demonstrate it is on track with its long-term plans, and we are leaving our fair value estimate and narrow moat rating unchanged. Earnings for the period increased to $3.5 billion from $2.1 billion a year ago thanks to improvements in its upstream and downstream segments. Upstream earnings rose to $3.9 billion from $2.2 billion last year on higher oil prices, continued low operating costs, and a 1.8% increase in production. Adjusted for portfolio effects, however, production grew 3.4% for the quarter and 8.2% for the full year, outpacing guidance of 5%-7%. Downstream earnings increased to $2.2 billion from $1.5 billion last year as growth in fuels marketing earnings from improvement programs more than offset weakness in lubricants earnings. Operating cash flow, excluding Gulf of Mexico payments, increased to $7.1 billion, including a $1.5 billion working capital build, from $6.2 billion for the quarter last year and for the full year totaled $26.1 billion, including a $2.6 billion working capital build, compared with $24.1 billion last year. Full-year free cash flow comfortably covered organic capital spending and shareholder returns.Management took the opportunity to update on its strategic plans and left major guidance items for the next couple of years, including capital spending of $15 billion-$17 billion per year, $10 billion worth of divestments, and gearing of 20%-30%, intact. Currently, leverage remains high relative to the target and peers at 30.3% at year-end. However, that is largely the result of the decision to not issue equity to complete the BHP deal, and it should fall toward the end of the year as divestments are completed.
The results demonstrate that BP is delivering on its plans to grow production while holding the line on operating and capital costs. With 15 more major projects under construction, BP should be able to deliver on its 5% CAGR production growth target through 2021.
Meanwhile, in the downstream segment BP has already delivered nearly half of its targeted $3 billion in earnings growth by 2021. In sticking with our thesis, we think this plan will ultimately lead to free cash flow growth in the coming years in a $60/bbl oil price environment, but it is not fully appreciated by the market.
BP is an integrated oil and gas group based in the United Kingdom. Co. is engaged in the exploration and production of crude oil and natural gas; refining, marketing, supply and transportation; and the manufacture and marketing of petrochemicals. Co. operates globally, with business activities in Europe, the U.S., Canada, Russia, South America, Australasia, Asia and parts of Africa. Co. operates in two business segments: Exploration and Production - including oil and natural gas exploration and development and production; and Refining and Marketing- activities include the refining, manufacturing, supply and trading, marketing and transportation of crude oil, petroleum and petrochemicals.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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