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BP (LSE: BP.) shares have been one of many FTSE 100’s standout performers over the previous yr, rising round 50%. However I preserve coming again to at least one query. Is that this rally being pushed by larger oil and gasoline costs, or is the market lastly beginning to re-rate the inventory as its new CEO accelerates the technique reset and simplifies the enterprise?
The excellence issues. If the shares are rising primarily on the again of a commodity value windfall, the rally may show tough to maintain. But when BP is turning into a leaner, extra worthwhile and financially resilient enterprise, I believe a sustained re-rating in direction of 700p might be inside attain.
Stability sheet restore
For me, one of the crucial encouraging developments from the corporate’s Q3 buying and selling replace is progress in direction of lowering web debt.
Again in February 2025, administration focused web debt of $14bn–$18bn by the top of 2027. That appears to have been achieved a yr early with web debt anticipated to fall from $22.3bn to $13.5bn–$14.5bn within the third quarter.
I believe this issues as a result of monetary flexibility is essential in a cyclical trade. When oil costs fall, a stronger stability sheet provides it extra room to spend money on engaging tasks and return money to shareholders with out placing the enterprise beneath pointless strain.
Nevertheless, not all this progress essentially displays stronger underlying money era. Asset gross sales, adjustments in working capital and unstable buying and selling circumstances have additionally influenced the corporate’s monetary place. The important thing query is whether or not it may well preserve web debt inside its goal vary when costs are usually not so beneficial.
How a lot of the rally is down to grease costs?
Brent crude averaged $96.99 a barrel in Q3, down from $103.85 within the earlier quarter. But its refining indicator margin jumped from $29.60 to $46.70 a barrel, with BP anticipating this to spice up its product phase’s consequence by $1.9bn–$2.1bn.
The corporate estimates that for each $1 change in Brent crude costs, pre-tax working revenue is impacted by $340m. The identical assumption impacts the refining indicator margin by $450m.
I bear in mind what occurred in 2022, when hovering power costs boosted BP’s earnings however did not ship an enduring share value re-rating. This time, I need to see whether or not stability sheet restore and an easier technique could make the positive factors extra sturdy.
Might BP shares nonetheless hit 700p?
I believe there are causes to consider this time might be totally different from 2022. On the coronary heart of that’s BP’s accelerated technique reset.
Its US onshore enterprise, BPX, is a key a part of the plan, with a goal to develop manufacturing to round 1 million barrels of oil equal a day by 2030. The redevelopment of the enormous Kirkuk oilfields in Iraq additionally provides scope to spice up manufacturing.
If BP can construct an easier enterprise, lower prices and strengthen its stability sheet, these investments may ship extra resilient money flows via the cycle. That might persuade buyers to worth the shares extra extremely, moderately than merely responding to grease value actions.
For me, 700p seems achievable if administration delivers. After years of underperformance, I believe BP shares are nonetheless price contemplating.
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Andrew Mackie owns shares in BP.
