Invest in BP stock for capital gains

Rising oil prices have been a boon for the entire industry, including BP (NYSE: BP), which is going through a transition phase and is developing local and renewable energy activities. In the first half of 2021, the company generated $ 11.5 billion in operating cash, paid off $ 7 billion in long-term debt, reducing net debt to $ 33 billion. According to the strategic footprint, the company is expected to return 60% of the excess cash in the form of buybacks and has announced a $ 1.4 billion share buyback program with second quarter results. Taking into account the policy of debt reduction and return on capital of the company, Trefis believes that the share is a good choice for achieving long-term capital gains. We highlight the key factors that lead BP valuation including revenue, margins, valuation multiple, and competitive comparison with peers in an interactive dashboard analysis.

Benefits of deleveraging: learning from the airline industry

The sharp drop in benchmark oil prices due to the coronavirus crisis has led to the implementation of a policy of debt reduction and capital conservation throughout the oil and gas industry. Declining profitability and an uncertain demand environment are two main reasons for this change. The airline industry has also faced pressure on margins due to increasing competition and weak demand growth in recent years. In 2016, Alaska Air Group (NYSE: ALK) implemented a debt reduction policy after the acquisition of Virgin America and restricted returns to shareholders such as dividend payments and buybacks. Thus, the ALK share has been rewarded by investors and is currently trading only 10% below pre-Covid levels. However, the actions of its competitor American Airlines (NASDAQ: AAL) remain 30% below pre-Covid highs and have been on a downward trajectory since 2018. In the article, What if American Airlines had implemented Alaska Air’s capital allocation strategy?, we compare the capital allocation strategy of the two companies and how deleveraging has benefited Alaska Air


BP’s changing asset base

According to the company’s investment plan, low-carbon energy and mobility solutions companies are expected to attract around 40% of total investment by 2030. Notably, new companies and conventional hydrocarbons will receive a capital allocation of $ 5 billion to $ 7 billion and $ 9 billion, respectively. . The main reason for this change is the anticipation of higher benefits from convenience and mobility activities. According to reports, low-carbon hydrocarbon, convenience and mobility and power companies are expected to generate a ROACE of 13%, 17% and 9%, respectively. (Related: Focus on renewable energies? Choose BP share on Exxon)

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