BP shares and the Great Game of global energy
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BP shares and the Great Game of global energy

BP shares and the Great Game of global energy

This author sees a number of reasons to accumulate British Petroleum shares at 523 pence

  • The rationale for Brent to rise to its April highs at $74 – 75 a barrel, presents an opportune moment to load up on Big Oil shares
  • BP boasts the highest upstream production growth in Big Oil, at least 5% per annum in the next three years
  • BP’s oil and gas production is a stellar 2.8 million barrels of oil equivalent

By Matein Khalid: Chief Investment Officer and Partner at Asas Capital  

It is a tragic, existential reality of international relations that Middle East geopolitics has a disproportionate impact on the world’s biggest traded commodity – light sweet crude oil. So it was no surprise that Brent rose to $63 and West Texas Intermediate rose to $56 after Iran’s Revolutionary Guards seized the UK flagged oil tanker Stena Impero in Omani waters near the Straits of Hormuz, the energy chokepoint through which one-third of the world’s oil and gas shipping passes.

After shooting down a $135 million US Global Hawk surveillance drone in international waters in the Gulf and almost provoking a retaliatory US airstrike, Iran has once again escalated geopolitical tension by a brazen violation of international law and maritime shipping. British Foreign Secretary Jeremy Hunt accused Iran of “state piracy” in a speech at Westminster.

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President Trump’s policy of “maximum pressure” on Iran and draconian economic sanctions has clearly unsettled the theocratic regime in Tehran to lash out against the West. Trump’s sanctions have been fabulously successful. Iran’s oil exports have plunged to a mere 300,000, down from 2.5 million barrels a day a few years ago. Iran’s inflation rate is 75% and its economy can well contract 7% in 2019. There is zero probability that President Trump will reinstate the oil export waivers to countries like China, India, Turkey and South Korea or roll back the JCPOA, Barack Obama’s signature diplomatic deal, in a Presidential election year, as Tehran desperately hopes.

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In fact, if negotiations between Prime Minister Boris Johnson and Iran’s diplomats do not result in the release of the oil tanker and its crew, a US-British airstrike could be the opening act in yet another catastrophic war in the Gulf. Iran’s decision to resume uranium enrichment has provoked alarm in Washington, London, Berlin, Paris, Tel Aviv and the chancelleries of the Arab world. As with the 1953 Operation Ajax against Dr. Mussadegh, the geopolitical chessboard of the Gulf could once again see the enactment of the ancient Persian chess move called “Shah maut” – checkmate.

This means a protracted geopolitical risk premium in crude oil prices, for now, the rationale for Brent to rise to its April highs at $74 – 75 a barrel, an opportune moment to load up on Big Oil shares.

BP was once owned by HM Treasury and known for decades as Anglo-Persian Oil Company (APOC) during the reigns of the last Qajar and two Pahlavi shahs of Iran. BP is one of the fabled Seven Sisters integrated global oil supermajors, with an American CEO (Bob Dudley) and a 20% stake in Rosneft, the Kremlin’s flagship oil and gas colossus chaired by the Putin regime’s éminence grise Igor Sechin.

I see myriad reasons to accumulate BP shares at 523 pence. BP boasts the highest upstream production growth in Big Oil, at least 5% per annum in the next three years. BP’s last dividend was a yummy 10 pence and I would buy the shares before the next dividend on August 8th. The cognoscenti in the City of London expect EBITDA margins to rise to 14.6% when BP reports on July 30. BP’s oil and gas production is a stellar 2.8 million barrels of oil equivalent (ex Rosneft). BP started work on three high margin barrel upstream projects in Trinidad, Egypt and the Gulf of Mexico in 2019. BP’s downstream fuels/lubricant/refining and marketing business is on a roll.

BP’s valuation is uber-modest at 4.6 times forward enterprise value to EBITDA. DP World, in contrast, was sold at 22 times enterprise value to EBITDA and 50,000 poor souls applied for the IPO – and then saw their shares tank by 80%. As I told my parents, if you think the price of Wharton was exorbitant (it was!) try ignorance! Nobody in my family had any exposure to the DP World IPO.

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BP’s leverage is high relative to, say, Shell or Chevron but its $10 billion asset sales program will reduce balance sheet gearing even as its cash break-even falls to $50. Macondo litigation risk? Reflected in current valuation since BP settled with Uncle Sam and the states of Texas, Oklahoma and Louisiana for a $2 billion payment in 2019.

Opinions expressed in this piece belongs to the author and do not reflect the opinions or beliefs of AMEinfo.

Author
Matein Khalid

Matein Khalid is responsible for global investment strategies, merchant banking, and the development of the multi-family office investment platform. He advises ultra-high net worth royal and family offices in the UAE on global equities markets and foreign exchange.

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