BP downgraded on concerns over stock buyback ability

By Steve Goldstein

BP saw a broker downgrade on Thursday after analysts said its stock buyback is less sustainable than rival integrated oil companies.

BP (UK:BP) (BP) was downgraded to hold from buy at HSBC, which also cut the target price to 490 pence ($37.32 per ADR) from 530 pence.

BP's London-listed shares slipped 0.2% to 430 pence.

Analysts led by Kim Fustier say BP's second-quarter results brought no change to strategy, ahead of a medium-term plan it will present in February. "Going into second-quarter results, some in the market had hoped BP would refresh its capital allocation to tilt back towards oil & gas while slowing down in renewables, as suggested in the media," the analysts said.

They say its 2025 earnings before interest, tax, depreciation and amortization guidance - of earnings between $46 billion and $49 billion at a $70-per-barrel Brent oil price (BRN00)- is at risk. The analysts see earnings of $41 billion, assuming a Brent price of $76.50 per barrel.

Granted, other sell-side analysts also are worried about BP's 2025 guidance, as the average estimate is around $42 billion.

BP has targeted $14 billion of stock buybacks in 2024 and 2025 - HSBC agrees though it said the 2025 buyback doesn't look fully funded. But the real issue, they say, is with 2026.

"While some of BP's oil major peers such as Shell and Total could maintain a flat buyback despite lower gas prices, we do not think BP has the ability to do so given its higher balance sheet gearing and weaker underlying cash flow growth," they say. Unlike rivals, BP didn't delever much during the 2022 energy price spike.

Using an 80% payout ratio, BP's distribution framework implies the stock buyback will fall to between $4 billion and $4.5 billion in 2026. That would put BP's distribution yield on par with Shell (SHEL) and TotalEnergies (TTE) and below that of Chevron (CVX) and Eni (IT:ENI), the HSBC analysts say.

-Steve Goldstein

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

08-08-24 0703ET

Copyright (c) 2024 Dow Jones & Company, Inc.