BP Could Be In The Early Innings Of A Multi-Year Inflection

Analyst Guy Baber said BP's year-to-date cash flow generation has exceeded expectations, both his as well as management's. The analyst indicated that the company's annualized first half cash flow generation of $22.4 billion is not far from the level necessary to fully cover both capex and the entire dividend (see his track record here).

Simon & Company also believes the momentum behind the cash flow is compelling. The firm noted that cash costs are on a downtrend, with the management focused on driving further efficiencies and capturing additional deflation.

The firm touted its production target for BP, which is at a 5-percent CAGR between 2016 and 2021, as one of the stronger growth profiles in the space. Additionally, the firm noted that BP has repositioned its downstream business in delivering material incremental cash flow and earnings growth over time.

While noting that BP has an organic capex target of $15 billion to $17 billion, the firm said certainty around the capital framework breeds certainty around free cash flow generation. With an estimated oil price of $50 per barrel in 2018, the firm believes BP is well positioned to fully cover its robust dividend.

"Bottom line, as confidence in BP's cash cycle and dividend sustainability improves, its outsized yield should normalize lower," the firm said.

Simon & Company sees BP's valuation as attractive, given its 6.6 percent dividend yield.

Following BP's better-than-expected results, the firm raised its 2018 and 2019 earnings per share estimate by about 7 percent each year and also raised its forward cash flow estimates by 1 percent.

As such, Simon & Company upgraded the shares of BP from Neutral to Overweight and raised its price target for the shares from $38 to $42, citing BP's improved financial resilience and attractive growth potential.