BP: Middle East tensions, OPEC+ and oil above $70 (NYSE:BP)

The current situation in the Middle East and recent voluntary production restrictions by major OPEC+ members include BP (New York Stock Exchange: BP), 2024 could be set to be a solid year, if not a record one. Still, in terms of income. As the Israel-Gaza conflict intensified last October, Iran-backed Houthi rebels began attacking shipping in the Red Sea, and tensions with Iran also put the Strait of Hormuz, one of the world’s most important oil arteries, at risk. Given this backdrop, I believe that oil companies overall could do well in 2024, and that BP could deliver strong results in 2024 if OPEC+ continues to support product pricing throughout the year.

previous evaluation

Only very recently, in September, did I upgrade and buy BP stock. OPEC+ voluntary supply restrictions. BP’s stock price has since fallen 12% due to falling oil prices. Saudi Arabia and Russia, the world’s largest oil producers, have decided to voluntarily limit crude oil production. At the time, Saudi Arabia reduced production by 1 million barrels per day, and Russia announced a decrease in exports by 300,000 barrels per day. But since then, OPEC+ members have agreed to deepen production cuts and the security situation in the Middle East has deteriorated significantly, which we believe will ultimately increase BP’s profit potential. The OPEC+ price action in particular is a reason to double down on BP as the company is set on a higher average oil price. BP is also one of the cheapest producers in the large energy sector, with a P/E ratio of 6.5x.

Deterioration of Middle East security system

A lot has happened since I last worked at BP. Israel and the Gaza Strip are at war, and Iran-backed Houthi rebels are attacking container ships in the Bab el-Mandeb Strait and the Red Sea. Iran is also posing a threat to global oil supplies by demonstrating its power in the Strait of Hormuz, a strait connecting the Persian Gulf and the Gulf of Oman. The Strait of Hormuz is one of the world’s most important oil arteries, with 20% of global oil liquids production passing through it, according to the Energy Information Administration.

Houthi attackThe attack in the Red Sea escalated into the largest attack on a ship on Tuesday.why. Clearly, rising tensions in the Middle East, still one of the world’s most important regions for oil production, are a potential catalyst for higher product prices. A barrel of oil currently costs about $72.68, giving energy companies like BP the potential to increase profits if prices remain high throughout 2024. The current Middle East setting is at least conducive to such a scenario.

For example, BP’s average oil price in the third quarter was $76.69 per barrel, down 13% from the same period last year. BP’s quarterly price history was published in late October 2023 (source). But with tensions rising again in the Middle East, there is also a significant opportunity for BP to benefit from higher prices. OPEC+ members also agreed to deepen production cuts in the fourth quarter of 2023 until the end of the first quarter of 2024. My expectations for 2024 are that these production cuts will be extended throughout the year, along with additional price support measures if oil prices fall.

BP’s business trends improved in the third quarter of FY23 due to a slight rebound in oil prices (average oil prices in Q3 ’23 increased 4% Q/Q). Overall, BP generated $6.7 billion in profit (before interest and taxes) in the third quarter, most of which came from its oil production and operations segment ($3.4 billion). Clearly, BP is broadly profitable at a price level of $73 to $74, which is almost identical to the average price of oil products in the second quarter ($73.57). During the second quarter of 2023, BP generated more than $5.1 billion in revenue for shareholders, and the energy company achieved average quarterly revenue of $8.3 billion in fiscal 2023 (through September).

Over the long term, BP’s earnings, cash flow, and earnings have proven to be highly volatile. This reflects broader market dynamics. BP’s profits plummeted during the pandemic but have since recovered steadily. However, the next bear market could result in another decline in BP’s sales and profits.

BP’s valuation vs. American Competitors

BP seems to be trading at a really cheap valuation multiplier. BP’s P/E ratio has fallen as higher oil product prices have boosted its energy sector profits. However, even taking into account cyclically inflated EPS, BP is trading at an attractive price-to-earnings ratio of 6.5X, making the British energy company significantly cheaper than Shell (SHEL), which has 7.5XP/. E ratio. BP is expected to earn $5.35 per share next year under the agreement, which supports its valuation, and the company is expected to see earnings growth of up to 5% per year over the next two years.

To include the two biggest U.S. competitors in the market, ExxonMobil (XOM) and Chevron (CVX) trade at P/E ratios of 11.1X and 10.6X. I believe BP could easily trade at 8 to 9 times its fiscal 2024 earnings, assuming high quarterly profitability and fiscal 2024 oil prices remain high. This means the fair value range is $42 to $47. The multiplier range (8-9X) and fair value estimates do not vary with short-term fluctuations in oil prices. U.S. competitors are also trading at higher valuation ratios than BP, suggesting the company may also be subject to a re-rating.

BP may be undervalued compared to its U.S. peers due to its high dividend history and aggressive share buybacks that support its stock price. U.S. companies are also investing heavily in U.S. shale regions, which, at least in theory, offer the potential for faster production growth.

Risks for BP, Outlook 2024

Oil prices are unpredictable and affected by world events such as terrorist attacks, wars, natural disasters, and economic decline. In particular, the current tensions in the Middle East are likely to lead to a sharp rise in oil prices if the security situation worsens further. On the other hand, a resolution of the Israel-Gaza conflict and Iran’s less aggressive stance, especially in the Strait of Hormuz, could push oil prices much lower, reducing BP’s profit potential.

As a result, BP’s pricing risks for certain of its products could potentially lead to lower profitability during downturns in energy markets, which could slow dividend growth or lower the amount of share buybacks that support BP’s stock price. Oil prices are clearly the biggest influence on BP’s finances, and given the recent price support provided by OPEC+, OPEC+ production decisions will need to be closely followed and monitored. I expect OPEC+ to continue to be a force supporting prices in 2024. It’s also worth following BP’s production business average prices, as a price drop immediately translates into lower sales and profits.

However, if oil prices remain high, we wouldn’t be surprised to see buybacks or new acquisitions likely after 2024. BP therefore primarily serves as a capital return for investors in a market where OPEC+ may play a more aggressive role in the future.

final thoughts

Tensions in the Middle East, especially in the Israel-Gaza region, Strait of Hormuz, and Red Sea regions, are a worrying trend. An escalation of the Israel-Gaza situation, which could draw Iran further into the conflict, could be a worst-case scenario given the importance of the Strait of Hormuz to global oil supplies, but it would likely be beneficial from a price perspective. BP remains highly profitable with oil prices at $73 per barrel, and we believe BP will be the best overall investment in the oil market for the fiscal year due to the current security situation in the Middle East, low P/E ratio compared to U.S. peers, and aggressive OPEC+ organization. do. 2024!