BP plc(BP:NYE) DZ Banks Downgrades to Sell on Write-downs, dividend in danger

STA Research
by: STA Research

Today, analysts at DZ Bank downgraded their Buy rating on BP plc to Sell, and currently has no target on the company.  The downgrade came after the company wrote down billions of dollars of value in it’s core business as the result of demand destruction due to the COVID crisis, increasing the transition to cleaner energy solutions. The write-off is the firms biggest reduction since the Horizon disaster 10 years ago.  

As a result the sustainability of BP’s dividend has come into focus, causing concern for analysts and investors alike.  Barclays analyst mentioned ”It does now look increasingly likely that BP will reduce the dividend alongside the second quarter results, with the shares trading on a 10% dividend yield, this already seems to be factored into the share price.”

The company cut it’s estimates for oil and gas prices between 20 and 30 percent, and expects carbon emission costs to rise considerably.

BP is reviewing it’s various projects as a causation of their price forecast changes, which could cause the abandonment of certain projects in which cost-structures are vulnerable to the shift in prices.

The company expects to record non-cash impairment charges and write-offs in the second quarter of this year, of approximately $13 billion to $17.5 billion.  This would have a negative impact on BP’s debt to equity ratio, pushing towards 50 percent which would be the highest in the sector. 

RBC’s analyst,  Biraj Borkhataria states “BP’s balance sheet was stretched even without this impairment, and is likely to look even more stretched following it,”.

The company also stated that  “BP now sees the prospect of the pandemic having an enduring impact on the global economy, with the potential for weaker  demand for energy for a sustained period, the aftermath of the pandemic will accelerate the pace of transition to a lower carbon economy.”

BP’s forward looking goal is to be a “net-zero” company by 2050, and braces for the decline in production and reiterates that any production will need to be de-carbonized as a result. The company has released its long-term price forecasts from 2021 to 2050, averaging in the vicinity of $55 compared to the pre-pandemic valuation of $70.

STA Research has a average target of $30 on the stock, and a consensus Buy rating. STA’s view of the stock is Slightly Bearish with a score of 3.8 out of 10, where 0 is very bearish and 10 very bullish.

What to like:
Superior risk adjusted returns
This stock has performed well, on a risk adjusted basis, compared to its sector peers(for a hold period of at least 12 months) and is in the top quartile.
Superior total returns
The stock has outperformed its sector peers on average annual total returns basis in the past 5 years (for a hold period of at least 12 months) and is in the top
quartile.
High dividend returns
The stock has outperformed its sector peers on average annual dividend returns basis in the past 5 years (for a hold period of at least 12 months) and is in the top
quartile. This can be a good buy, especially if it is outperforming on total return basis , for investors seeking high income yields.
Positive cash flow
The company had positive total cash flow in the most recent four quarters.
Positive free cash flow
The company had positive total free cash flow in the most recent four quarters.

What to not like:
Overpriced compared to earnings
The stock is trading high compared to its peers on a price to earning basis and is above the sector median.
Overpriced compared to book value
The stock is trading high compared to its peers median on a price to book value basis.
Overpriced on cashflow basis
The stock is trading high compared to its peers on a price to cash flow basis. It is priced above the median for its sectors. Proceed with caution if you are considering to buy.
Poor return on assets
The company management has delivered below median return on assets in the most recent 4 quarters compared to its peers.
Higly leveraged
The company is in the bottom half compared to its sector peers on debt to equity and is highly leveraged. However, do check the news and look at its sector and management statements. Sometimes this is high because the company is trying to grow aggressively.
Low Earnings Growth
This stock has shown below median earnings growth in the previous 5 years compared to its sector
Low Revenue Growth
This stock has shown below median revenue growth in the previous 5 years compared to its sector
Low Dividend Growth
This stock has shown below median dividend growth in the previous 5 years compared to its sector.

 

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