BP stock: strong cash flow recovery, undervalued

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Shares of BP (BP) remain fundamentally undervalued as the company experiences a strong recovery in earnings and cash flow due to strengthening oil demand and rising end-market prices. As oil prices approach $100 a barrel, BP has considerable upside potential!

Profit and cash flow recovery

The post-pandemic recovery in oil markets and the easing of travel restrictions related to COVID-19 have led to a massive improvement in BP’s earnings and cash flow outlook. As oil prices approach $100 a barrel, energy companies trading in petroleum products face increasingly promising EPS and cash flow growth prospects in 2022. Oil prices have risen from minus $37 per barrel in fiscal year 2020 to nearly $100 per barrel today. . The price spike was driven by a gradual recovery in travel business and a post-pandemic economic boom that persists to this day. The result of this strengthening in demand and prices was that BP presented a strong fourth quarter results sheet two weeks ago.

While BP’s total liquids production (net of royalties) in the fourth quarter was virtually unchanged from a year ago, at around 1,004 mb/d, due to the sale of producing assets, the change product pricing made a big difference for BP in the fourth quarter. BP liquids prices fell from $38.58 per barrel in Q4’20 to $71.07 per share in Q4’21. That’s a 1.84X factor increase year over year and it has improved BP’s earnings situation significantly.

BP Production Q4 2021

PB

BP’s oil production and operations generated a profit of $4.0 billion in the fourth quarter, a 7.1-fold increase over the prior-year period, mainly due to improved prices . Profits for fiscal 2021 rose to $22.3 billion after the company generated a loss of $2.8 billion in pandemic year 2020 in which the travel industry suffered. been closed for months. The earnings outlook for fiscal 2022 is bright and BP could see continued improvements in its financial performance this year.

BP underlying RC profit before interest and tax

PB

Due to the continued rebound in oil prices, especially in Q4’21, BP generated $3.0 billion in excess cash flow. Excess cash flow is cash flow that exceeds BP’s capital expenditures and it was used to pay for the company’s growing buybacks in 2021. In the fourth quarter, BP bought back $1.73 billion from its shares, and an additional $1.5 billion will be used. for takeovers in the first quarter of fiscal 2022. With excess cash flow likely to increase further in fiscal 2022, BP could announce another major takeover this year.

BP Cash and Balance Sheet

PB

BP still has a very attractive valuation

BP’s prospects for business growth in the oil industry are undervalued. The company has a PE ratio of 7.3X based on expected earnings for fiscal year 2023, indicating that the oil company is significantly undervalued relative to its earnings and cash flow potential in the current oil bull market. Due to high prices in the petroleum products market, EPS gains and higher cash flows can be expected in fiscal year 2022 and beyond.

FISCAL YEAR 2022

FISCAL YEAR 2023

FISCAL YEAR 2024

Sales

$178.09 billion

179.94B

179.62B

Annual growth

12.90%

1.04%

-0.18%

PES

$4.84

$4.37

$4.55

Annual growth

26.69%

-9.73%

4.16%

P/E ratio

6.56X

7.27X

6.98X

(Source: Author)

Risks with BP

Oil prices are unpredictable and although the price of a barrel of oil is close to $100, nothing could prevent market prices from falling significantly at any time. Bear markets generally present a risk to BP’s earnings and cash flow…and also to the stock. I don’t believe we are at the end of the current bull cycle in oil markets yet, but another crisis in the industry is never far away. The impasse between Ukraine and Russia poses a considerable risk to oil markets. The new coronavirus-related lockdowns and the suspension of travel activities are also business risks for BP and its stock.

The dividend should grow

BP cut its dividend in fiscal 2020 as the pandemic gathered pace and lockdown restrictions temporarily grounded the travel industry. With BP potentially close to record cash surplus in fiscal year 2022, BP could return to a place where it starts increasing its dividend again. BP shares are currently yielding 4.0% and the company is covering its distribution with earnings and cash flow. If end market prices remain high in fiscal 2022, shareholders could consider a higher dividend.

BP's dividend yield and earnings yield
Data by YCharts

Final Thoughts

BP is an excellent investment choice in the oil industry. The earnings and cash flow outlook has improved significantly in fiscal 2021 and the post-pandemic petroleum products market recovery has legs to stand on. With prices remaining high in end markets and prices approaching $100 a barrel, BP will continue to benefit from continued cash flow growth. Strong pricing could also result in a record cash surplus for BP this year and secure stable (growing?) payouts to shareholders. Excess cash flow will also be used for share buybacks, potentially supporting BP shares!

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