Jefferies Downgraded BP Stock To Hold

The article sheds light on why Jefferies downgraded BP from Buy to Hold

Marc Kofler and Jason Gammel, analysts at Jefferies, have reduced BP plc. stock to hold from Buy, with the sell side firm seeing the cash cycle of organic company “increasingly comprised”, according ot latest BP stock analysis.

In contrast to its rivals, the bank projects the company stock to become the most leveraged one in the year 2017, with a 30% gearing ratio as pointed out by BP stock news. The sell side firm pointed out that in spite of the oil incident that took place in 2010 badly affected the asset base of the company; BP still has a small but high quality asset base.

Declining crude oil prices and the oil spill incident have massively impacted the company. The incident has cost BP around $54.6 billion, and the amount might rise further if the court gives its decision of the law suit against it, which can cost them additional $2.6 billion. The settlement with federal, local and state government of $18.7 billion was the biggest development in the law suit, as it shows the liabilities of BP.

The bank projects earnings of 46 cents per share for 2917 and a price target of $33 compared to previous stock price target of $42. However, BP’s valuation at 5.5x 2017 EV/DACF is almost in line with the industry, the period between 2014 and 2018 production growth CAGR is much less than its competitors.

The sell side firm also reduced its international crude benchmark estimate of 2015 by almost 9% to $54/barrel and 2016 estimate by 10% to $61/barrel. It is also dropping its forecasts for 2017 by almost 6% to $73/barrel, whereas the long term forecast of $100/ Barrel has also declined to $85/ barrel.

Analysts at Jefferies believe that market situations are going to get worse in the coming two years, projecting break even oil prices to be $76/ barrel, more than its 2017 expectation. The investment bank has had this outlook from the beginning of the current year when it believed crude oil prices might fall this year, but now it expects that oil prices aren’t going to improve.

Jefferies is expecting results from OPEC members in the future, putting further pressure on crude oil prices. The oil market is in total chaos, with more supply and less demand. In spite of falling crude prices, producers of oil haven’t stopped supplying crude oil to the market. On the other side, the second biggest economy of the world, China hasn’t been performing up to the mark, and so the oil market is finding it difficult to recover.