BP Stock: Be Cautious About Chasing This Rally (NYSE:BP)

Thesis

BP p.l.c. (NYSE:BP) reported a strong Q2, elevated its distribution, and an additional inventory repurchase to the delight of buyers because it benefited from strong oil and fuel costs.

We additionally highlighted in our July replace that BP was seemingly at a backside and will stage a short-term rally. Subsequently, we aren’t shocked that a lot of its near-term upside was captured pre-earnings, because the market appropriately anticipated a stable Q2.

Nevertheless, BP had pulled again from its post-earnings uplift and will additionally kind a possible bull entice (indicating the market denied additional shopping for upside decisively). Whereas not validated but, we urge warning as ongoing promoting stress in Brent crude may affect BP’s efficiency shifting ahead. We additionally imagine Henry Hub pure fuel costs may have peaked, doubtlessly impinging on its ahead working outcomes.

Subsequently, we urge buyers to be affected person and never chase the rally. Accordingly, we reiterate our Maintain score on BP.

Strong Q2 Delighted BP’s Buyers

BP reported an unbelievable Q2 that noticed a report replacement-cost revenue of $8.45B, up 202% YoY, effectively above the consensus estimates of $6.8B. Moreover, it additionally reported an working money circulate of $10.86B, up 100.8% YoY, because it benefited tremendously from report oil and fuel costs.

The corporate additionally raised its distribution by 10% and introduced one other $3.5B inventory repurchase program. Notably, the corporate’s confidence is based on its skill to drive efficiency with a $40 per barrel money stability level. CEO Bernard Looney accentuated (edited):

We need to preserve a powerful stability level. We need to anchor on that $40. That signifies that this quarter, given the truth that the corporate is operating effectively, and the outlook for the atmosphere, we’re in a position to increase the dividend by 10%, and accomplish that whereas sustaining a $40 oil worth breakeven. The primary name in our monetary framework is our dividend. And we discuss it being a resilient dividend, which signifies that we need to shield that dividend given our expertise of getting to chop it simply 2 years in the past. So we’re very centered on ensuring that our buyers and our house owners can depend on that dividend. And subsequently, we imagine that it stays prudent to keep up a $40 breakeven worth in mild of the truth that costs are a lot, a lot greater at the moment. (BP FQ2’22 earnings name)

However Watch Out What’s Subsequent After A Report Quarter

The consensus estimates (bullish) point out that Q2 could possibly be BP’s peak income development earlier than falling dramatically by means of FY23. However, BP’s strong working mannequin ought to proceed to undergird its profitability. Subsequently, we’re not involved about near-term dangers impacting its capital allocation insurance policies.

Moreover, BP’s working money circulate development is projected to reasonable additional. Whereas we do not anticipate it to affect its dividend coverage, we imagine the Road is modeling for a marked fall in oil and fuel costs shifting forward.

We famous that Brent crude and Henry Hub pure fuel futures are in backwardation, with Aug 2026 costs effectively under the pricing of the present contracts, notably for pure fuel. We additionally mentioned in a current EQT Company (EQT) article, positing that pure fuel costs have seemingly topped out. BP additionally cautioned in its filings (edited)

Decreases in oil, fuel or product costs may have an antagonistic impact on income, margins, profitability, and money flows. If these reductions are important or for a protracted interval, we might have to put in writing down property and reassess the viability of sure tasks, which can affect future money flows, revenue, capital expenditure, and the power to work inside our monetary framework and preserve our long-term funding program. (BP 10-Okay)

Is BP Inventory A Purchase, Promote, Or Maintain?

Our worth motion evaluation means that the near-term upside from its Q2 efficiency is probably going mirrored, given the run-up in July. It has additionally outperformed the Brent crude (grey line overlay), because the market anticipated a strong Q2 launch.

Brent crude can be at a important juncture, because it’s testing its near-term assist. It practically gave up all its post-war positive factors because the market renewed its concentrate on recessionary themes and demand destruction. Citi (C) additionally cautioned in a current commentary, because it emphasised (edited):

It means the market is not anticipating tightness forward, it is anticipating issues to loosen up. It is provide purely enjoying towards demand. Extra provide and fewer demand for oil usually imply costs would fall. That is one thing that should concern firms whereas it’s one thing very nice for customers. – Insider

Nevertheless, Brent crude may nonetheless stage a bear entice (indicating the market rejected additional promoting draw back resolutely) over the subsequent couple of weeks. Subsequently, a short-term rally may comply with if a bear entice is validated.

Nevertheless, we proceed to induce warning for buyers contemplating chasing the present rally in BP, given its worth motion and valuation (mentioned in our earlier article).

As such, we reiterate our Maintain score on BP.