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Equity Research; BP

BP Q4 and FY2016

There are a number of pointers in these results:-

Conclusion

For FY2016 BP “borrowed” its 40 cent dividend payout; it added $8.3bn in more debt. Mortgaging the company to pay shareholders is not sustainable, there will come a time when BP will have to rebase the dividend.

It is hard to escape the conclusion that BP needs further substantial gains in crude oil (FY2016 average $38.27/barrel) and gas prices ($2.84/ mcf (million cubic feet) v $3.80 (FY2015)) to get close to net cash generation. A $60 price is required to arrest BP’s debt accumulation however crude prices have stalled at $50-$53/ bbl.

We are concerned that FY2017 BP’s oil production growth is likely to be very low single digit and BP may embark on acquisitions to compensate (like Shell/ BG). An acquisition might be well received if the right partner at the right price is found. BP’s valuation has dropped 11.5p or £2.2bn broadly reflecting the lower profit/ higher debt load combination (BP’s higher debt is worth 34p per share). An earnings miss is important and likely to lead to profit downgrades.

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