Barclays has published its European top picks this week and included among them was oil giant BP PLC (LON:BP.).
Its 'overweight' stance on the controversial integrated oil major is based on the potential for belt-tightening on operating expenditure, which it believes is not reflected in the share price.
Barclays reckons growth of almost 800,000 barrels of oil equivalent per day (boepd) is due to come on stream with cash margins 35% higher than the current portfolio.
“Our analysis shows that sanctioned projects have the potential to add $4bn of cash flow net of declines by 2020 and up to a further $1bn potential upside from projects that are yet to be sanctioned, but could be on stream by that point. This additional cash flow from projects coming on-stream, combined with the continued effort to reduce the cost base, particularly at the corporate level, should enable BP to maintain and even grow the current dividend level over the coming five years. As a result we see the 7.8% yield and 60% potential upside to our 550p per share price target as compelling,” Barclays concluded.
Liberum, meanwhile, sticks with its 'hold' recommendation and 382p target price after reports emerged that Judge Carl Barbier of the Federal District Court in New Orleans granted final approval on Monday to an estimated US$20bn settlement over the 2010 BP oil spill in the Gulf of Mexico, resolving years of litigation.
The settlement, first announced in July, includes US$5.5bn in civil Clean Water Act penalties and billions more to cover environmental damage and other claims by the five gulf states and local governments. The money is to be paid over 16 years.
According to Liberum, BP has estimated its costs related to the spill, including clean-up and various settlements and penalties, will exceed $53 billion.
“It would be a positive for BP if the uncertainty is clarified,” Liberum suggested.
JP Morgan Cazenove has reiterated its 'overweight' recommendation for Gemfields PLC (LON:GEM) after the coloured gems specialist released a strong update yesterday detailing results of its auction of high quality rough emeralds.
“The next auction will take place in May in Japiur (India) and is expected to consist of lower quality emerald and beryl from Kagem. We note the previous lower quality emerald auction took place in Dec’15 (also in Jaipur), generating gross sales of $19.2m at an average price of $4.32/ct. JPMe [JP Morgan estimates] 4.0Mct [million carats] at an average price of $3.50/ct, with our expectation that pricing in the lower quality segment will likely continue to come under pressure, in-line with commentary from the wider gemstone sector,” the broker said.
Anglo American PLC (LON:AAL) has announced the sale of its 70% interest in the Foxleigh met-coal mine in Queensland to Taurus Fund Management, and although the terms of the transaction are confidential, UBS believes proceeds should be close to zero with the asset cash-flow negative in 2015.
Anglo acquired its stake in December 2007 for $620mln. The sale is part of the strategic clean-up of Anglo's Australian coal mines, and there are more disposals to come.
UBS, which rates the shares as a “sell”, reckons there is a risk of value erosion through asset disposals. The Swiss bank thinks the debt-heavy miner will only be able to raise around $4bn or $5bn from its disposal programme, rather than the $7bn it is targeting in the medium term.
UBS's price target is 400p. Shares in Anglo are down 5.6% at 517p today.
Deutsche Bank has downgraded retail titan Tesco PLC (LON:TSCO) from 'buy' to 'hold', saying new boss Dave Lewis has ticked many boxes in his first year at the helm, but competitive pressures remain, and a recovery in the top line should not be taken for granted.
“We continue to expect the best relative EBIT [underlying earnings] margin development at Tesco vs UK peers, driven primarily by commercial gross margin gains and cost cutting. However, the share is up 35% in the past three months,” Deutsche notes.
The share price may have risen but Deutsche's price target remains 210p, versus the current price of 188p or thereabouts.