BP Earnings: Improved Earnings, but Full Impact of Higher Prices Yet to Be Seen

Key Morningstar Metrics for BP

• : $41.60
• : ★★★

• Morningstar Economic Moat Rating

  : None

• Morningstar Uncertainty Rating

  : High

What We Thought of BP’s Earnings

BP’s BP first-quarter earnings of $3.2 billion increased from $1.4 billion the year before, exceeding market expectations. Stronger refining and trading performance drove the improvement, as production pricing lags meant upstream earnings didn’t fully reflect the impact of the war in the Middle East.

Why it matters: BP’s upstream earnings are still set to benefit from higher oil and gas prices resulting from disruptions in the Middle East. However, pricing lags mean they won’t show up until the second quarter. Cash flow was also hit by $6.0 billion in working capital tied to seasonal effects and price increases, about half of which should reverse this year.

• The more favorable outlook since the beginning of the year did not cause BP to reinstate share buybacks, but it will retire $4.3 billion in hybrid bonds by the end of 2027, with a $2.5 billion reduction set for the second quarter.
• Guidance for structural cost reductions increased to $6.5 billion-$7.5 billion by the end of 2027, with the agreed sale of the Gelsenkirchen refinery announced in March.

The bottom line: Our no-moat rating and fair value estimate are unchanged, leaving shares modestly overvalued. Our fair value incorporates the latest futures pricing, but assumes a moderation over the next few years to our mid-cycle price of $65/barrel.

• If prices were to remain higher for longer than currently implied by futures, our earnings and cash flow estimates and our fair value estimate would be higher. BP would benefit from accelerated debt reduction, which could also lead to the reinstatement of its repurchase plan.
• With BP’s strategy now more focused on oil and gas and therefore aligned with peers, the heavier debt burden is now holding it back. Accelerating debt reduction due to higher prices would help the firm close the gap more quickly and remove an overhang on its stock.