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Investment Thesis
The global energy market in 2022 has been volatile. The conflict between Ukraine and Russia has wreaked havoc on energy supply chains, especially in light of the sanctions placed on Russia, a key player in the oil business, which has contributed significantly to the current high levels of volatility.
Not even BP p.l.c. (NYSE:BP) has been spared the upheaval that has befallen the energy industry. The highly fluctuating share price it has experienced over the past year indicates its responsiveness to industry volatility. The company’s strategic management is mainly to credit for the 31% increase in share price over the past year, despite the inherent volatility of the industry in which it operates.
I believe the company’s ongoing exercise of repurchasing its shares has contributed to and will continue to contribute to a rise in the value of the company’s stock. Additionally, the firm has been aggressively pursuing mergers and acquisitions to fuel future growth and, in particular, shifting to bioenergy. I am bullish on this company’s long-term success, mainly due to the potential acquisition of Archaea Energy, which I believe will catalyze the company’s transition to bioenergy.
Company Overview
BP Plc is an integrated oil and gas organization. William Knox D’Arcy started it on April 14, 1909, and its headquarters are in London, UK. It uses three main divisions to carry out its business: upstream, downstream, and the Rosneft subsidiary.
The Upstream segment: It explores, develops, produces, transports, stores, processes, and markets natural gas, including liquefied natural gas, power, and liquids.
The Downstream segment: This section provides processing, production, distribution, transportation, supply, and trading of petroleum, petrochemical, and crude oil products to wholesale and retail clients.
The Rosneft segment: It engages in investment activities.
The Archaea Energy Acquisition
BP has made several high-profile acquisitions and mergers, with four coming in the last five years. The company has decided to acquire what I believe will be the most critical factor in its transition to bioenergy. By acquiring Archaea Energy, a renewable national gas [RNG] producer based in Houston, BP has shown its commitment to its biogas transition strategy.
BP has increased its investment into bioenergy, one of its five “strategic transition growth engines,” in a $4.1 billion agreement that includes $3.3 billion in cash and $800 million in net debt. The oil and gas firm has identified bioenergy, convenience, electric vehicle charging, renewables, and hydrogen as critical growth engines. By 2030, BP hopes to invest around half its annual capital budget in these industries. By 2025, the company plans to have invested over 40 percent.
Republic Services, situated in Phoenix, will benefit from purchasing Archaea because of the synergy that will be created between the two companies. In May of 2022, the two companies formalized a collaboration in which Archaea would have the right to design, engineer, build, and manage RNG plants installed in Republic’s landfills throughout 19 states. With the initial project development beginning in late 2022, the two businesses anticipate that the 39 total projects will produce over 12.5 million MMBtu of RNG annually.
This acquisition gives BP the resources it needs to further develop its biogas operations in the United States and abroad, particularly in the United Kingdom and Germany. By 2030, Archaea’s output and pipeline will increase BP’s biogas supply volumes to roughly 70,000 boe/d worldwide. When all the pieces have been put together, bp projects that its EBITDA will rise from the current $140 million to over $500 million by 2025, to $1 billion by 2027, and double-digit returns.
Share Repurchase
While sustaining a stable dividend is still a key objective for the company, I view the recent share repurchase as a deliberate move to protect shareholders from the ebb and flow of the payout. In addition, it’s a practical means of dealing with the UK government’s harsh tax system, in my opinion. I believe that rising share prices continue to be the primary focus of value investors, although there are many other benefits that investors shall derive from the continued share prices.
During the Q3 transcript call, the company announced its commitment to returning 60% of 2022 surplus cash flow through share buybacks.
Murray Auchincloss,” we remain committed to returning 60% of 2022 surplus cash flow through share buybacks…”
Until October 31, BP had repurchased 677 million shares against the permission granted at BP’s 2022 AGM to repurchase up to 1.95 billion shares. Furthermore, they plan to undertake a $2.5 billion buyback before reporting fourth-quarter results, using the $3.5 billion surplus cash flow they generated in the third quarter. Up to this point, the total announced share buybacks from 2022 surplus cash flow totaled $8.5 billion, or 60% of 2022 surplus cash flow year-to-date.
I think this is a wise move by the management because, besides the direct boost to share prices, the buybacks will also have the following benefits:
- Bring tax efficiency: If the company distributed the cash through dividends, the shareholders would be taxed, but rising share values aren’t taxed.
- More flexible than dividends: Any corporation that starts or raises a dividend must keep paying. If they cut the dividend, they risk decreased share prices and disgruntled investors. Management has more flexibility with one-time share buybacks.
Given the company’s volatile dividend and the high taxes in the UK, I believe the current move to repurchase shares is appropriate.
Conclusion
Despite the volatility in the oil market, BP has managed to increase its share price by around 31%. I anticipate long-term share growth for the company due to its recent acquisitions, most notably its purchase of Archaea Energy. The current share repurchase program will catalyze the short-term gain of the company’s share price. This buyback indicates that management values its stock highly and sees great potential for future growth due to its current low price. As we wait for the acquisition of Archaea Energy to close, I see this company as a rocket ready to blast off once the deal is finalized.
