Seeking Alpha Opinion 2.010 Jul 2024 18:44
BP: No Thanks, I'm Buying American
Summary
European oil stocks, including BP, trade at lower multiples than American peers due to ESG diversification and market skepticism on non-oil operations.
BP's recent performance suffers from negative headlines, lower refining margins, and geopolitical challenges, further widening the gap with American oil giants.
Despite a solid dividend and potential for growth, BP's focus on renewables and uncertain long-term strategy make it less attractive compared to U.S. counterparts.
Introduction
Three things are certain in life:
Death.
Taxes.
European oil stocks underperform their American peers.
While I'm obviously joking a bit, it is widely known that European energy majors don't have the valuation multiples their American peers enjoy.
Using the forward P/E ratio metric, we see the three Americans, Exxon Mobil (XOM), Chevron (CVX), and ConocoPhillips (COP), are trading all at 12x NTM earnings.
The European giants, BP (NYSE:BP), Shell (SHEL), and TotalEnergies (TTE), all trade at 9x or less.
I covered the company in an article on November titled; "Despite Its Valuation, BP Remains A Hard Pass For Me."
Since then, shares have gone nowhere, pressured by new negative headlines that I will discuss in this article.
So, as we have a lot to discuss, let's get right to it!
BP Isn't Offering What The Market Wants
The biggest reason American and European oil stocks are trading at two very different valuations can be summarized in one sentence:
European companies are more prone to ESG-related diversification, Or, to put it differently, the European oil majors have a much bigger focus on non-oil operations, which most have done in response to political/social pressures to make their businesses more sustainable.
The problem - for BP - is that market participants do not want to go "beyond petroleum." They are buying big oil for a reason.
Especially after the pandemic, it became slowly obvious that the energy transition was not going to put an end to oil and gas demand growth. Even the sustainability-focused International Energy Agency, which I consider to be often too pessimistic, does not expect peak demand in oil until at least 2030.
Despite the slowdown in growth, global oil demand is still forecast to be 3.2 million barrels per day higher in 2030 than in 2023 unless stronger policy measures are implemented or changes in behaviour take hold. - IEA
OPEC is even more bullish, expecting oil demand growth to last beyond 2040, fueled by emerging market demand offsetting declines in OECD nations.
Especially if we add that supply growth is slowing, we get a strong long-term thesis for oil and gas.
In light of these developments, investors want a few things from an oil company:
Deep reserves and growth potential.
Healthy balance sheets.
A focus on shareholders through (special) dividends and/or buybacks.
BP has all of this. HOWEVER....TBC....
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