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Atlantic View – The Reinvention Of BP – Is It Too Early To Buy In?

by John Woolfitt, Atlantic Capital Markets

The Reinvention Of BP – Is It Too Early To Buy In?

Fundamentals & Statement Summary

Oil giant BP (BP.L) today (Tuesday August 4th) announced a record $6.7 billion loss for Q2 2020 as the COVID crisis hit the group hard across its energy businesses and at the pumps. As result BP cut its dividend for the first time in a decade, and outlined plans to sharply reduce its oil and gas output and boost renewable power generation. The net loss was in line with analysts’ expectations and came about after the BP took the decision to wipe $6.5 billion off the value of oil and gas exploration assets and revised oil and gas price forecasts.

Net debt at the end of the quarter fell $10.5 billion to $40.9 billion, with gearing also down to 33.1% vs. 36.2% at the end of the previous quarter. A dividend of 5.25 cents per share was announced for the quarter (10.5 cents previously), aligned with BP’s new distribution policy.

The group said Global GDP is expected to contract by 4-5% this year, and consequently global oil demand is expected to be around 8-9 million barrels of oil per day lower than 2019 and gas markets are likely to remain materially oversupplied.

BP CEO Bernard Looney outlined a strategy to “reinvent” BP in line with a global transition to low-carbon energy.

“These headline results have been driven by another very challenging quarter, but also by the deliberate steps we have taken as we continue to re-imagine energy and reinvent BP.”

“In particular, our reset of long-term price assumptions and the related impairment and exploration write-off charges had a major impact.”

Within 10 years, BP aims to have increased its annual low carbon investment 10-fold to around $5 billion a year, building out an integrated portfolio of low carbon technologies, including renewables, bioenergy and early positions in hydrogen and CCUS. By 2030, bp aims to have developed around 50GW of net renewable generating capacity – a 20-fold increase from 2019 – and to have doubled its consumer interactions to 20 million a day while at the same time shrinking its oil and gas production by 40% compared with 2019.

“We believe our new strategy provides a comprehensive and coherent approach to turn our net zero ambition into action. This coming decade is critical for the world in the fight against climate change, and to drive the necessary change in global energy systems will require action from everyone.” Looney said in a statement.

“So, in the years ahead, bp is going to significantly scale-up our low-carbon energy business and transform our mobility and convenience offers. We will focus, and reduce, our oil, gas and refining portfolio. And, as we drive down emissions on our route to net zero, we are committed to continuing to deliver long-term value for our stakeholders.”

BP said in its strategy update it aimed to “reset a resilient dividend” of 5.25 cents per share per quarter and return at least 60% of future surplus cash as share buybacks.

Chart and Technicals

Source: FactSet and Hargreaves Lansdown

BP’s 233.7p multi year low hit on March 18th, on the face of it provided investors with a once in a lifetime entry point in the midst of the COVID19 crisis. The stock went on and recovered the 50-day moving average intra-day late April, holding the level before falling away in June. The yellow envelope marks the upper and lower price 44 day price ranges: while the stock trades below this level a retest of the multi-year low is likely to occur if the market falls. If BP can ‘climb back’ into the price range envelope after the results today, and in the process regain the 50-day moving average, then our next target is the ‘falling’ benchmark 200-day moving average, currently at 395p, by the end of Q3 2020.

Summary and Atlantic View

In the current climate, it might seem somewhat risky to back an oil company as a buy. However, as I have outlined in our Atlantic Month Ahead Atlantic presentation here, we are market neutral and seeking long term growth opportunities that minimise risk. The losses announced by BP today, although substantial, were in line with analyst expectations, while the strategy shift completely repositions the group’s forward investment proposition by consistently reducing the reliance on oil and increasing revenues from an integrated portfolio of low carbon technologies, including renewables, bioenergy, hydrogen and CCUS. These moves tick most of the boxes in regard to the Atlantic investment strategy, and while near term COVID risks remain, we expect any early evidence of revenue growth from BP’s low carbon portfolio to act as a catalyst for the share price. Added to this, there is still a dividend on offer: this quarterly dividend can be collected before the ex-dividend date of August 13th. Atlantic rating: Buy.

To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here

Atlantic View – Has StageCoach (SGC) turned the Corner?

by John Woolfitt, Atlantic Capital Markets

Has StageCoach turned the Corner?

Fundamentals & Statement Summary

Britain’s biggest bus and coach operator Stagecoach (LON: SGC) employs around 25,000 people and operates more than 8,300 buses, coaches and trams across operations in England, Scotland and Wales, plus the Supertram light rail network in Sheffield.

In its preliminary results statement today, SGC reported adjusted pre-tax profits to May 2nd 2020 had fallen to GBP90.9m from GBP132.9m previously, on revenues of £1.41bn, down from £1.87bn previously. SGC highlighted an adjusted EPS of 13.5p (2019: 22.1p), while the statutory EPS of 6.4p (2019: 3.8p) reflected non-recurrence of prior year charges relating to the impairment and disposal of the discontinued North America business. On the COVID crisis, SGC said that management actions and the continuing support of government should ensure the group remains EBITDA positive and poised to benefit from any new opportunities. 

Significantly, SGC pointed out a substantial warchest of available liquidity, with over £800m of undrawn, committed bank facilities and available cash/deposits. Added to this, regional bus revenue trends were improving pre-COVID, plus SGC has embarked on growth initiatives and diversification to balance the portfolio and open up new markets. As a result, the group has been shortlisted to bid for two Dubai bus contracts, plus one rail and four bus opportunities in Sweden. SGC also are at the forefront of sustainability and green initiatives, and are nearing completion of a new sustainability strategy with a roadmap to a zero carbon business.

CEO Matthew Griffiths said SGC had “achieved a creditable set of financial results in what has been one of the most challenging and sobering periods for citizens, communities and economies across the globe in living memory.”

“Prior to the COVID-19 pandemic, the business was on track to meet its expectations for the full year. We made good progress in delivering on our three key strategic objectives: to maximise our core business potential, manage change through our people and technology, and grow by diversifying, while maintaining our relentless focus on safety and customer service. In responding to the more recent global challenges, we have taken decisive action so that the business remains in as strong a position as possible and well placed to secure the significant long-term opportunities we see for public transport.

Griffiths also pointed to the supportive short-term actions by government and local authority partners, which “have helped protect public transport networks, which are critical to the country. We have also been encouraged by the good momentum created by the positive direction of government bus policy and investment.”

Chart and Technicals

Source: FactSet and Hargreaves Lansdown

As with all stocks during Q1 2020, SGC suffered the inevitable ‘Covid cliff fall’, with group shares falling 2/3rds in value from January to February 2020. A series of ‘false dawns’ since that point resulted in SGC shares briefly regaining the 50-day moving average, currently at 61p, before dropping back again. If the stock can regain the 50-day moving average on an end of week close basis, in a recovering market we would expect SGC shares to regain the benchmark 200-day moving average (purple indicator), currently at 111p, by the end of Q3 2020.

Summary and Atlantic View

Many may take the view that a public transport company offers few if any prospects as an investment. While this may have been true in the past for some of transport operators, our view is that despite the COVID-19 impact on travel, the Government continues to press ahead with initiatives to encourage the general public to reduce carbon emissions by using ‘green’  buses and trains. Stagecoach, and its fleet of green buses and trains are very much at the forefront of this push to zero emissions, and as such we believe the group will continue to receive strong support from Government at National and Local level. With shares now trading at 10 year + lows, new contract shortlists, and with a strong financial position and warchest, Atlantic are backing the shares to ‘turn the corner’ and recover to £1 by the end of Q3 2020 with a ‘Speculative Buy’ rating. An extra incentive is also on offer from this investment ‘vehicle’. Stagecoach also stated in today’s results that “it is our ambition to resume dividend payments in due course.” Atlantic rating: Speculative Buy.

To take advantage of this trading idea, speak to a member of our dealing team on 01872 229000 or visit the Atlantic Capital Markets website here

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