BP PLC's (LSE:BP.) American shale business will be a large part of the group’s growth over the remainder of the decade, analysts at RBC today highlighted in a note.
RBC, which rates BP at ‘outperform’, believes that the oil majors investment plans are shifting away from ‘transition growth engines’ (effectively a pseudonym for ‘net zero’ projects) in favour of upstream business, albeit, RBC notes that this has yet to be formalised as a strategy by BP.
The firm’s US shale business unit, known as BPX, operates across three basins: Permian, Eagleford, and Haynesville, with current production of approximately 425,000 barrels of oil equivalent per day (kboed), 80% of which consists of gas and natural gas liquids (NGLs).
By RBC’s numbers, BPX's earnings (EBITDA) are projected to reach around $4 billion by 2025, which, on a 5x multiple suggests, an enterprise value of $20 billion for the subsidiary.
BPX is pencilled in to invest some $2.5 billion a year between 2023 and 2030, with most of the funds expected to go on drilling and well completions within its existing footprint.
“From our meetings BPX, it is clear that it would like to grow, but is cognizant of BP’s wider commitments to the market,” RBC analyst Biraj Borkhataria said in the note.
“With significant consolidation ongoing in US shale, this is a challenge, as BPX effectively has no acquisition currency, and is cash-constrained, with a relatively small position in the Permian (75k net acres).
“That said, BPX noted that growth plans to 2030 are underpinned by its current acreage, and although it would need to “re-load” oil inventory at some point, it was not a near-term concern.”
More broadly, commenting on the BP business as a whole, the analyst added: “BP screens with an elevated free cash flow (FCF) yield vs peers (14% in 2025e vs the sector average 10%), and even after adjusting for hybrids & other liabilities, we see a positive risk-reward.”
RBC has a 650p price target for BP, suggesting some 40% upside to the current price of 462.9p.