Investec pleased with "confident" update from BP, but stock still a 'hold'

Investec came away from BP’s seminar this week with largely positive comments, saying that the oil major delivered a “confident upstream update” despite the recent sharp drop in oil prices.

However, the broker said that with uncertainties surrounding Russia and the continued fall-out from the Macondo oil spill disaster still weighing on the business, it has kept a ‘hold’ rating.

Brent crude hit a fresh five-year low on Wednesday, dipping below $65 a barrel (bbl), well below the $100-plus/bbl level it was trading at in September.

The same day, BP updated investors at a seminar, saying that it would take $1bn in non-operating restructuring charges over the next five quarters, largely thought to be a result of job cuts.

“There was no meaningful change to upstream strategy, BP’s targets, nor its reference parameters […]. However, BP reminded that, for some time, it has tested project economics at $80/bbl, within a $60-100 range,” Investec said.

“It has indicated the $1bn headcount reduction charge is less a function of the oil price, but rather ‘right-sizing’ the organisation post-disposals.”

Regarding the oil price, Investec cited comments from the company which said that in previous crashes, prices had recovered within two years.

“However, this required intervention from Opec, something which has not yet happened this time around,” the broker said.

It said that BP is currently trading at 8.5 times estimated earnings for 2015, based on Brent crude running at $100/bbl. This is a 14% discount to the wider sector, excluding BG Group.

Alternatively, based on a target price-to-earnings multiple of 10, BP is discounting a long-term oil price of $85/bbl, a 5% discount to the sector.

Investec maintained a target price of 440p for the shares, which was trading 1% higher at 403.55p by 10:26 on Thursday.