BP shares ‘overweight’ contrary to market perception says Barclays

• BP shares are overweight, according to Barclays.
• BP share price down this week but still bullish at 311.05p.
• Will cash flow and investments offset a lack of new drilling opportunities?
• Ready to trade the BP share price? Open an account today

The price of BP shares could be one to watch in the coming months - that’s the verdict of analysts at Barclays, anyway. This assessment comes as the energy company’s six-month price chart continues its upwards trajectory.

The BP share price opened at 311.05p today. Although that’s down from the weekly high of 321.95p, it’s still up almost 23% from the 253.45p share price in November. The recent bull run means BP shares are inching towards pre-pandemic levels.

Where was the BP share price and where is it heading?

Before Covid-19 restrictions hit in March 2020, the BP share price was comfortably above 490p. Barclays’ analysts do not have such a bullish outlook at the moment, but they believe 475p is a realistic target for BP in the coming months. Cash flow and cost savings are fuelling support for a 47%+ upside on the current price.

Analysts acknowledge that BP’s ‘upstream business’ is ‘shrinking’. However, they see the oil company’s current cash flow as both an underrated metric and, in turn, better than its competitors. Analysts at Barclays stated that:

‘Our analysis shows the cash flow generation of the business as having the ability to support a 10% cash return to shareholders in the form of dividends and buybacks in a US$60 per barrel environment, which would be the highest in the sector.’

Alongside the better than average cash flow, BP is also looking to sure up some of its assets and increase savings. It entered talks with Eni this week to merge their oil and gas assets in Angola. The new entity would become one of the largest energy companies in Africa. It would also give BP a strong partner with which to explore new investment opportunities.

What else could boost BP shares?

A merger with Eni could complement BP’s ongoing renewable energy efforts. The company is currently investing in wind projects in Scotland and with Equinor in the US Atlantic. These changes, combined with increased marketing spend, have led Barclays’ analysts to conclude that BP shares are set to perform ‘contrary’ to what they believe is ‘perceived by the market’. The potential downside for the BP share price could be a new report from the International Energy Agency (IEA).

Although the push for sustainable energy and a reduction of carbon emissions is nothing new, the IEA has recommended that major energy companies stop new exploration projects from 2022. The report states that focusing on current drilling sites and not searching for new ones is necessary if global net emissions are going to reach zero by 2050. This could hamper BP’s short-term growth.

New investment projects should help, but the net is closing in on oil and gas production long-term. Despite that fact, analysts at Barclays believe the current ‘aggregate cash flow’ from ‘traditional units’ is ‘enough to fuel investments in low-carbon emissions projects’. And, perhaps more significantly, they believe it is enough to ‘ensure competitive cash returns to shareholders’.

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