America’s energy majors have placed their bets. The deals they have sealed show they believe demand for oil will be healthy far into the future. Shell’s boss has signalled a tilt back towards hydrocarbons. BP is in limbo.
Without a permanent boss, uncertainty hangs over whether the FTSE 100 group will stick with the pivot towards renewables started by Bernard Looney, the chief executive who abruptly resigned in September, or row back in the hope of reviving an underperforming share price.
An enterprise value of just 3.4 times forecast earnings before interest, taxes and other deductions puts BP at a discount to big US peers as well as European counterparts TotalEnergies and Shell.
Missing third-quarter profit expectations has added more pressure. Underlying replacement cost profit of $3.3 billion was below the $4 billion consensus figure, a disappointment largely stemming from its gas trading division. It comes after several quarters of heightened volatility that had subsided recently.
Last month saw two megadeals in the industry, with Chevron agreeing its biggest ever acquisition in the US independent oil and gas company Hess, and ExxonMobil’s $60 billion bid for the Texas-based exploration group Pioneer Natural Resources. Murray Auchincloss, BP acting chief executive, said that no major M&A within the US energy market is on the cards for BP to ramp up capacity.
He points to projects that put 36 billion barrels of oil equivalent in the hopper, 18 billion of which are economic right now. That is enough to see BP’s underlying production grow to 2025 and adjusted earnings from oil and gas to hit between $30 and $32 billion, and stay at that level to the end of the decade.
A plan to distribute 60 per cent of surplus cash back to shareholders saw another $1.5 billion share buyback declared alongside third quarter results. That was alongside a 7.27 cent-a-share dividend.
• BP shares lose their spark after ‘weak’ performance by gas traders
Current capital return plans look sustainable, even if commodity prices falter. The dividend can be held, based on oil at $40 a barrel, and raised at an annual 4 per cent with oil at $60. Likewise, share buybacks of $4 billion are on the table this year while Brent Crude is around $60 a barrel, below the average realised price of $86.75 in the third quarter.
Surplus cash amounted to $3.1 billion in the third quarter and just over $5 billion so far this year. Analysts think BP will be able to sustain free cashflow of between $9 billion and $13 billion out to 2027, including $13.8 billion this year. The rest of the extra cash will go towards paying down debt, $22.3 billion at the end of September. That is already down by around a third over the last decade. The group is reaching for an improved “A” investment grade credit rating, which analysts at RBC Capital reckon it should be on course for at the start of next year.
That is likely to prompt investors to start thinking about an increase in the cash payout ratio next year, the investment bank thinks. That would be one catalyst for the shares. Another, naturally, would be the announcement of a permanent boss and a better idea of whether BP will join its peers and allocate more of its capital to hydrocarbons.
Capital expenditure is expected to come in at the lower end of this year’s $16 billion to $18 billion target range. That is the result of some potential acquisitions “not meeting returns thresholds”, according to Auchincloss. It is plausible that potential deals now on ice are those in the low carbon sector, analysts at RBC Capital say, where valuations are harder to justify as interest rates have rapidly risen.
A fall in BP’s shares on the back of the Chevron and Exxon deals is a telling sign that the energy major remains vulnerable to a takeover tilt.
Advice Hold
Why The shares are cheap but there is a lack of strategic clarity
IG Group
IG Group is finding the extra weight harder to wear since the fading of the pandemic trading boom. Ploughing cash into its core spread-betting platform and costly expansion into the US and Europe has caused its cost base to swell.
It has now unveiled plans to slash 300 jobs, or 10 per cent of headcount, in an effort to save £100 million over the next three years. The group is also seeking to cut out an extra £10 million in variable costs this year to help mitigate weaker trading volumes that have continued into the second quarter.
Analysts at Jefferies think the cost savings will add almost 10 per cent to adjusted earnings by 2026. The actual figure is dependent on market conditions and trading appetite, over which there is inherently very little visibility. The poorer quality of the income stream is one reason the shares trade at a discount to DIY investment platforms such as Hargreaves Lansdown or AJ Bell.
Yet IG’s shares are harshly priced even relative to their own history. They currently trade at just six times forward earnings, close to the lowest since the aftermath of the last great financial crisis in 2009. It would take an, unlikely, halving in earnings this year to push that multiple back to 2021 levels of about 13.
The $1 billion takeover of the US-based tastytrade.com, a platform focused on futures and options, has been another weight on the shares as investors question whether IG overpaid for a business bought at the height of the lockdown trading boom.
Downsizing is designed to help IG keep margins within its target range of the mid to high-40s in percentage terms. Last year, the adjusted pre-tax margin declined to 48 per cent, from 51.1 per cent the year before and 55.5 per cent in 2021. In that time, costs have risen at a compound rate of 20 per cent, while net trading has risen just 5 per cent.
Before any adjustments, forecasts from analysts at Shore Capital implied a pre-tax margin of 47.6 per cent for this year.
Revenue was flat in the first quarter. More focus on costs should give investors confidence that it can stay within its margin targets.
Advice Buy
Why Pessimism priced into the shares seems overdone
