Why Goldman Sachs Is Now Bullish On BP

The oil and gas sector is in the midst of a large expansion of pipeline projects and BP plc (ADR) BP looks like a standout after underperforming the European market and oil sector over the past year, according to Goldman Sachs.

The Analyst

Goldman Sachs' Michele Della Vigna upgraded BP from Neutral to Buy with an unchanged $54 price target.

The Thesis

Several of BP's most capital-intensive projects, including the Shah Deniz Phase 2 in Azerbaijan and Tangguh Train 3 in Indonesia, will start production within two years, Della Vigna said in the upgrade note.

BP will be no longer need large capex commitments, which gives it "more headroom" to re-invest capital in higher-return projects, the analyst said. 

Over a four-year period, BP will benefit from material production growth from its pipeline of upstream projects, which will result in strong cash flow generation, Della Vigna said. The company could even see higher upside from oil prices, as current assumptions call for $60-per-barrel Brent in 2018 and beyond. BP's portfolio of new projects is more profitable today at $60 Brent oil than it would have been in 2014 when oil was trading at $100 a barrel, according to Goldman Sachs. 

BP's non-E&P businesses are performing well, including an upgraded Midwest refining portfolio in the U.S. that's yielding benefits from a wide WCS-WTI spread, the analyst said. Financial damages from the Deepwater Horizon spill should move lower from $7 billion in 2016 to $1 billion from 2020.

BP now offers investors an "interesting" turnaround story with potential for strong free cash flow generation and improving returns, according to Goldman Sachs. 

Price Action

Shares of BP were trading higher by 0.77 percent after the open Tuesday. 

Related Links:

An E&P Pair Trade Idea From Goldman Sachs

Gina Sanchez: Buy Exxon Mobil, Avoid Macy's