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On Monday, Morgan Stanley (NYSE:MS) downgraded BP Plc. (NYSE:BP:LN) (NYSE: BP) stock from Equalweight to Underweight and raised the price target to GBP3.77 from GBP3.40. The research firm expressed concerns over BP’s performance and strategic balance, highlighting that the company’s shares have lagged behind peers due to several investor worries. According to InvestingPro data, BP’s stock has indeed underperformed with a -16.85% return over the past year, though analysis suggests the stock may be undervalued at current levels.
The analyst from Morgan Stanley noted that BP has been grappling with three main issues that have affected investor sentiment. The first is the company’s strategy in balancing ’old’ and ’new’ energy sources. The second concern is the balance sheet, with BP having significantly higher leverage compared to its peers, reflected in its debt-to-equity ratio of 1.22. The third issue is the delivery of quarterly earnings, which has seen a notable decline since 2023, only partly attributed to lower commodity prices. Despite these challenges, InvestingPro data shows BP maintains a strong dividend yield of 6.38% and has sustained dividend payments for 34 consecutive years.
BP addressed the first concern during their Capital Markets Day in March, where they presented an ambitious plan that included major cost savings, capital expenditure reductions, disposal strategies, and a refocus on oil and gas operations. This plan was anticipated and is seen as a step in the right direction for the company’s strategic rebalancing.
Despite BP’s efforts to outline their strategy, Morgan Stanley believes that gaining more confidence in earnings delivery and improving the balance sheet will require time. The successful execution of their current plan is crucial but presents a challenge, especially in the context of lower oil prices. The firm suggests that these factors contribute to a more cautious outlook on BP’s stock.
In other recent news, BP Plc reported financial results for the first quarter that fell short of market expectations, prompting RBC Capital Markets to lower its price target for the company from GBP 4.80 to GBP 4.50, while maintaining a Sector Perform rating. BP has also decided to pause its $2.2 billion biofuels expansion project at the Castellon refinery in Spain due to slower-than-expected market growth, although it is still considering a similar expansion in Rotterdam. Additionally, BP is contemplating selling minority stakes in its Kaskida and Tiber projects in the Gulf of Mexico as part of a strategic shift back to focusing on oil and gas. Meanwhile, Elliott Management is seeking shareholder support for potential changes at BP, which could include cost reductions and leadership reshuffles, following the company’s pivot back to hydrocarbons. In another development, Apollo Global’s managed funds are acquiring a 25% non-controlling stake in BP Pipelines for approximately $1 billion, as BP aims to achieve $20 billion in divestments by 2027.
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