eyeQ: BP - buy the dip?

"Our signals are crafted through macro-valuation, trend analysis, and meticulous back-testing. This combination ensures a comprehensive evaluation of an asset's value, market conditions, and historical performance." eyeQ

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BP

Macro Relevance: 78%
Model Value: 419.54p
Fair Value Gap: -11.85% discount to model value

Data correct as at 11 November 2024. Please click glossary for explanation of terms. Long-term strategic model.

BP (LSE:BP.) has fallen ~15% year to date, lagging far behind other integrated oil companies. In sharp contrast, Shell (LSE:SHEL) is +3% year to date. This is despite crude oil trading higher year to date.

BP recently reported stronger than expected third-quarter earnings but flagged that it may need to shift its approach to buybacks, causing concern. There is a strategy update next February where the market will look for guidance on both this and the company’s ongoing assessment of its renewable strategy.

Now Donald Trump wants the US to “drill, drill, drill”, which is supportive of the demand side for oil in the long term. BP generates almost a third of its revenues from the US – positioning it to potentially benefit from a friendlier fossil-fuel backdrop. Although there are fears of oversupply, a focus on hydrocarbons over renewables could boost the long-term demand for oil.

We note also that BP is a standout among peers of having lagged the oil price the most. More broadly, the FTSE 100 appears relatively better positioned than other European indices given that almost 30% of revenues come from the US where corporate taxes are likely to decline.

Through a fundamental lens, BP is now trading on 7.3x 12-month forward consensus earnings and offering a prospective annual dividend yield of 6.8% (among the highest in the FTSE 100). These valuation metrics are also at a substantial discount to its US peers such as Exxon Mobil Corp (NYSE:XOM).

Through eyeQ’s smart machine, the valuation discount is also looking compelling. BP is trading 11.9% below eyeQ’s macro warranted model value at 419.5p – now larger than Shell. Macro relevance has been high and steady at 78% with the stock wanting higher nominal GDP growth and higher oil – no surprise. However, the dislocation to eyeQ’s model value is the largest since June. In contrast to the stock price, eyeQ’s model price has been rising since the start of October (see the chart below).

For now, the market may continue to believe in “Trumpflation” and higher US nominal growth. BP does have exposure to this theme and eyeQ would argue that the valuation discount should not be so wide, despite broader strategy concerns at the company. Take advantage of the dips.

Source: eyeQ. Past performance is not a guide to future performance. 

Useful terminology:

Model value

Where our smart machine calculates that any stock market index, single stock or exchange-traded fund (ETF) should be priced (the fair value) given the overall macroeconomic environment.

Model (macro) relevance

How confident we are in the model value. The higher the number the better! Above 65% means the macro environment is critical, so any valuation signals carry strong weight. Below 65%, we deem that something other than macro is driving the price.

Fair Value Gap (FVG)

The difference between our model value (fair value) and where the price currently is. A positive Fair Value Gap means the security is above the model value, which we refer to as “rich”. A negative FVG means that it's cheap. The bigger the FVG, the bigger the dislocation and therefore a better entry level for trades.

Long Term model

This model looks at share prices over the last 12 months, captures the company’s relationship with growth, inflation, currency shifts, central bank policy etc and calculates our key results - model value, model relevance, Fair Value Gap.