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On Thursday, JPMorgan analyst Matthew Lofting upgraded BP Plc (NYSE:BP:LN) (NYSE: BP) stock from Underweight to Neutral, while also increasing the price target from £4.40 to £5.10. The upgrade is based on several factors, including the potential value of BP’s stake in Rosneft, the relatively low impact of EU and UK gas market volatility on BP, and the company’s current valuation in light of recent activist movements. According to InvestingPro analysis, BP appears undervalued at its current market price, with the stock showing strong momentum with a 16.85% year-to-date return.
Lofting highlighted the "outsized Rosneft option value" as a key reason for the upgrade. Even when risked at 50% of its pre-Russia/Ukraine conflict book value, this stake represents about 10% of BP’s market capitalization, which could significantly benefit the company in the event of a ceasefire. The analyst pointed out that this could aid BP’s deleveraging efforts, equivalent to a 700 basis point reduction in net debt to capital employed, when risked. InvestingPro data shows BP operates with a moderate debt level, maintaining a healthy current ratio of 1.25 and demonstrating strong financial health with an overall score rated as "GOOD."
Furthermore, Lofting noted that BP’s exposure to volatile EU and UK gas markets is relatively modest. In fact, increased volatility could potentially support BP’s gas trading business. Additionally, BP’s discounted valuation compared to the sum of the parts net asset value (SOTP NAV) is at the higher end among European oil majors. This valuation gap is seen as more relevant due to recent news of activist interest in the company. The company has demonstrated strong shareholder returns, with InvestingPro revealing a notable 34-year streak of consistent dividend payments and a current dividend yield of 5.5%. Get access to 12 more exclusive InvestingPro Tips and comprehensive analysis in the Pro Research Report.
The analyst also mentioned that while BP’s cash yield has tightened, with a 12-month annualized yield of 10.3% compared to Shell (LON:SHEL)’s 11.1%, the company’s strategic commentary following the full year results and the potential influence of activist investor Elliott Management could lead to a more profound cost reduction and asset disposal strategy. Lofting’s comments suggest that JPMorgan sees a more balanced risk-reward profile for BP, leading to the upgraded stock rating and revised price target. With an EBITDA of $30.41 billion in the last twelve months and management actively buying back shares, BP continues to demonstrate strong operational performance and commitment to shareholder returns.
In other recent news, BP Plc reported its earnings before interest, tax, depreciation, and amortization (EBITDA) for 2024, which came in at $38 billion, missing its target of $40.9 billion. As a result, BP announced a reduction in bonuses for its senior executives to 45% of the target. Meanwhile, Elliott Capital Management has acquired a nearly 5% stake in BP and is advocating for a substantial divestment program while supporting BP’s current independent strategy.
In terms of analyst ratings, Bernstein reiterated an Outperform rating on BP, setting a price target of GBP5.70. UBS also adjusted its price target for BP, increasing it to GBP5.25 while maintaining a Buy rating, citing expectations of a faster rate of deleveraging. Additionally, BP is undergoing a strategic overhaul, focusing more on oil and gas, which could involve significant changes to capital allocation.
In other developments, Reliance Industries (NSE:RELI) and BP lost a decade-long gas drilling dispute in India, with the Delhi High Court ruling against them. Despite the setback, Reliance Industries may consider taking the matter to the country’s top court. These recent developments highlight significant changes and challenges for BP and its partners.
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