Jefferies upgrades BP to 'buy', spies possible dividend increase

Analysts at Jefferies upgraded their recommendation for shares of BP from 'hold' to buy', telling clients that the firm's gearing had likely already peaked "in the near term" and that a dividend hike was possible in the third or fourth quarter of 2019.

In a research note sent to clients, the analysts described the oil major's operational performance as "solid", saying that it had made "strong" progress on reaching the targets set out in its 2017 five-year plan.

"We believe gearing has likely peaked and see multiple near term catalysts including a dividend increase," they said.

The company would be able to lower its gearing back down within its target 20-30.0% range and to repurchase enough shares to offset the dilution from scrip dividends since the third quarter of 2017.

And if it could deliver $4.0-5.0 of divestitures then it could raise the payout.

"This would mark a significant inflection point in the company's leverage and cash cycle," Jefferies said.

Regarding BP's divestitures, it had recorded $0.7bn in proceeds thus far in 2019, which together with those from already announced transactions would take the total to $1.5bn.

The company was targeting $4.0-5.0 of divestitures for 2019 and Jefferies believed that BP's legacy Lower 48 portfolio could fiull the gap, telling clients that the San Juan basin (estimate: $2.2bn) and Wamsutter (estimate: $0.9bn) had the potential to be agreed - if not completed - before the current year was out.

Then current weak US natural gas prices were a risk but those proceeds would be enough to lower BP's gearing to within its target range.

"We also expect that if the company has line of sight to reducing the gearing range below 30% there is a good chance the Board will increase the dividend around either 3Q or 4Q results. We model a 3% CAGR in DPS from 2020-2025," they added.

Arguing that the recent underperformance in the shares had left the stock at an "attractive" valuation, they bumped up their target price from 595.0p to 625.0p.