Oil Major BP Resilient In Volatile Energy Market

Amidst ongoing geopolitical challenges and supply disruptions stemming from Russia’s invasion of Ukraine and OPEC+ decision to curtail global production levels, BP (LON: BP) stands at the forefront of changing global energy supply dynamics, benefiting from the persistent energy inflation that has become staple to most developed economies. With the UK’s Rishi Sunak's 'energy profits levy' also casts uncertainty over the North Sea oil and gas industry, the market now grapples with the implications of this aggressive move on BP's future prospects.

Supply disruptions out of Russia and OPEC have significantly impacted global oil markets, with Brent Crude surging to $120 a barrel following the EU's compromise deal to ban most Russian oil imports by the end of 2022. For BP, this volatile energy landscape has brought both challenges and opportunities. The recent state interventions aimed at tackling the cost-of-living crisis further add complexity to BP's investment climate.

Despite Harbour Energy's likely exit from the index and Shell's concerns about North Sea investments, BP's CEO Bernard Looney acknowledges that short-term windfall taxes may not alter the company's investment plans. However, the proposed 'multi-year' energy profits levy raises questions about the feasibility of BP's North Sea exploration and development initiatives.

Related: Asia Snapping Up U.S. Crude Oil In Near Record Amounts

Beyond these immediate concerns, investors speculate on BP's potential to recoup losses from the ongoing exit of its 19.75% stake in Rosneft, as Shell's recent sale of Russian petrol stations to Lukoil stirs hope for similar moves. Yet, uncertainties loom as new Russian dividend regulations threaten the possibility of BP's stake being seized, creating further complexities in the company's strategic decision-making.

Despite these current challenges, BP's strategic positioning and resilience in the face of volatile markets warrant a closer examination.

Current consensus and market sentiment

BP PLC, the global oil and gas giant, has recently attracted attention for its financial performance amid fluctuating market conditions. The majority outlook on BP is mixed, with varying opinions among different analysts. JPMorgan and Berenberg have both reduced their price targets, while Jefferies reiterated its hold rating with a slightly lower target price.

Goldman Sachs and UBS analysts remain optimistic, maintaining their "Buy" ratings on the stock. The investment bank reduced its target price, but it still indicates a positive outlook for BP. UBS's target price remains unchanged, indicating confidence in the company's performance.

In summary, while there is a consensus on BP's positive outlook with an "outperform" rating onaverage, individual analysts' price targets and opinions continue to vary due to the fluid geopolitical situation pertaining to Russia’s redirection of its energy exports to Asia i.e. away from the West.

The average investment rating suggests a positive outlook, with analysts generally leaning towards an "outperform" recommendation. Global supply shortage risk remain highly probably when considering OPEC’s continuous effects to reduce production levels in reaction to the weaker global economic outlook for the second-half of 2023.

Technical Analysis

Over the last three years, BP's share prices have made a remarkable rebound, recouping over 60% of the losses suffered since the peak in July 2018. Back then, prices reached a high of $48 before crashing to lows of $15 in November 2021. However, benefiting from the revival in Brent crude prices - which dipped as low as $20 per barrel, BP and the entire oil sector have been on a rally, capitalizing on global disruptions, lost Russian energy supplies due to US/EU sanctions, and mounting geopolitical concerns that have added risk premiums to energy products worldwide.

*Chart 1. Tradingview data: BP Share Price – Mar 2016 to June 2023

*Chart 2. Tradingview data: BP Share Price – Oct 2021 to June 2023

However, most of last year’s trades were within a horizontal price trajectory, aligning with the sideways movement observed across the crude oil market from late-November 2022 to late-July 2023. As the Brent Crude market faces uncertainty due to Russia's refusal to extend the grain deal with Ukraine, Moscow’s designation of all commercial ships as potential military targets, in the Black Sea, has risen geopolitical tensions alongside trading risk premiums.

*Chart 3. Tradingview data: BP Share Price – December 2022 to June 2023

*Chart 4. Tradingview data: Brent Crude oil prices – December 2022 to June 2023

Breaking out of the recently congested $35 region, BP's share prices have surged by +6% since late- May 2023. The stock now trades above the key support level of its 61.8% Fibonacci retracement (key support), indicating positive momentum in the short-to-medium term. The potential for prices to breach the $37.48 resistance level, which was last tested back in May 2023, continues to rise with the latest geopolitical tensions lifting risk and insurance premiums across the board.

Chart 5. Tradingview: BP Share Price – Jul 2016 to June 2023

With geopolitical concerns continuing to heighten, and global energy supplies experiencing disruptions, BP's share prices are poised for further gains. Markets have continued to closely watch the company's performance, as it stands to ride the wave of the Brent Crude market, and capitalize on future global shortage issues.

Fundamental Analysis

BP PLC has demonstrated impressive fundamental performance in the energy sector with a market cap of $106.24 billion and an enterprise value growing to $132.55 billion. The company's stock appears to be undervalued amid current uncertainty over its exposure to future Russia asset seizures, offering an enticing entry opportunity for long-term holding – or at least through the current military crisis involving one of the world’s largest energy commodity producer. The trailing price- to-earnings (P/E) ratio of 4.42 further supports this notion, indicating room for potential growth once clarity is gained and pending events come to pass.

BP's financial health is fortified by its impressive revenue performance, with the company reporting

$248.4 billion in revenue over the trailing 12 months. Notably, BP achieved robust quarterly revenue growth of 14.30% year-on-year, showcased its ability to adapt to dynamic market conditions impacting the entire sector. The company's gross profit of $67.81 billion over the last 12 months indicates efficient cost management having seen the head counts fall since June 2022, further enhancing its financial stability during a period of crisis.

Profitability over the last year has remained a key strength for BP, evident in its net income of $26.11 billion and diluted earnings per share (EPS) of $8.27. Additionally, BP's operating cash flow and levered free cash flow of $40.34 billion and $33.35 billion, respectively, underscore its strong cash flow generation capabilities in times of rising interest rates and increased cost of credit.

BP maintains a solid liquidity position, with $30.88 billion in total cash reserves. However, it is essential to closely monitor the company's total debt, which stands at $57.2 billion. The total debt/equity ratio of 65.61% raises concerns about its debt management strategies, requiring prudent risk assessment.