By Mihir Gupta, Ameya Joshi, Sukrith Kumar (University College London) and Filippo Palacino (ETH Zurich)
Stock Name: British Petroleum
Sector: Oil and Gas, Energy
Hold (Immediate short term i.e. for 1 week)
Short (Short - medium term i.e. in 2-2.5 weeks)
BP PLC (The British Petroleum Company PLC) is a British oil and gas company and is considered as one of the world’s seven supermajors in the sector. It has over 70,000 employees stationed across 79 countries. The company grossed over $4bn in profit attributable to shareholders in 2019 with its revenue totalling to $272bn.
BP is restructuring their core business model in response to climate change. These changes include:
Increasing investment in low carbon energy ventures - investments set to increase by a factor of 10 by 2030.
Refocusing their hydrocarbon business - expected to reduce production by 40% by 2030 while committing to no exploration in new countries.
Developing a net-zero culture - lowering emissions from production and operations by 35% over the next ten years.
As per the latest financial statements, the company reports an overall loss of $16.8bn for Q2 - FY 2020-21, while the same period in 2019 saw profits of $1.8bn. This is a result of the ongoing COVID-19 pandemic, the 2020 Russia-Saudi Arabia Price war, and sanctions placed on Rosneft in February 2020 - a Russian oil and gas company which BP has 19.75% equity in.
BP is a vertically integrated company, meaning it is the owner of its supply side operations. The company is categorised by its Upstream, Downstream, Rosneft segments.
Upstream: The Upstream segment is responsible for oil and gas exploration, development and production, and marketing and trading prospects. It is also responsible for providing the resources supply needed to create and market products. It is run through principles of outperforming competitors through its protocols on emissions, exploration, and deployment of technology; expanding their gas portfolio to be the provider of low-carbon natural gas as an accessory to their renewables ventures, and expanding margins through the goal of being a returns-focussed firm.
Downstream: The Downstream segment involves the manufacturing of capital products, and operates to integrate oil trading and supply. Aimed as a product and service-led branch of BP. The segment specialises in selling and creating logistic networks to market fuels (gasoline, diesel, and aviation fuel), lubricants, and petrochemicals.
Rosneft: Rosneft is one of Russia’s largest oil and gas companies which BP has a 19.75% stake in. They operate across Upstream and Downstream operations and BP serves on the board of directors through two representatives and enjoys a 20%, 49%, and 49% stake in three oil and gas ventures in Siberian basins respectively.
We have utilised the ‘Top-Down’ Approach to conduct a short-medium term industry and sector analysis. The premise of this analysis lies in judging whether or not a security is worth investing or not by vertically analysing sectoral performance across a range of indices and securities and iteratively eliminating securities that stick to the particular criteria. Eventually, the motive to constrict the scope of choices from which the final decision is made.
Keeping that in mind, the ‘Top-Down’ analysis for BP emerges from the initial analysis of the general market conditions where the stock is listed in; the sector it operates within and its limited competitor portfolio that matches BP in terms of their scale of operations.
The aforementioned Products and Offerings section is testimony enough to establish the fact that the company operates within the Oil and Gas Industry. Additionally, given the revetting shift towards the use of renewables - the company has also been transitioning towards providing different energy resources worldwide. Resultantly, it can also be concluded that BP has a significant spot within the Energy sector. In that regard, a reliable benchmark for understanding the global outlook for the Energy Sector is to assess the performance of the S&P 500 Energy Index. In fact, even though BP is a UK based company, we believe that given its size and scale of multi-territorial spread it allows it to have a significant impact on the aforementioned index.
Graph 1: S&P 500 Sectoral movements for the past 6 months (Barchart.com as on 09/10/2020)
Graph 2: S&P 500 Sectoral movements for past 3 months (Barchart.com as on 09/10/2020)
Graph 3: S&P 500 Sectoral movements for past 5 days (Barchart.com as on 09/10/2020)
Consequently, inspecting the performance of the sectoral index in comparison with other sectoral indices in the last six months; three months; and one week allows us to conclude that the Energy Sector has perhaps been the most severely hit by the COVID 19 pandemic. Additionally, contrary to sectors such as Consumer Staples, Materials, Consumer Discretionary, and Utilities, it has struggled to witness a positive sentiment over the summer months. Resultantly, moving ahead - we believe that these indicators combined reflect a bearish outlook for the sector. Having said that, a 5.0% pickup in the sector over the last week does reflect a correction if not a complete reversal because of which we believe that some buying may be witnessed in the sector and equity specific to the sector.
Graph 4: S&P 500 Energy downward wedge formation (Investing.com as on 11/10/2020)
This aspect is further supported by the candlestick movement witnessed for the S&P 500 Energy Index (as shown in Graph 4). Ever since the index entered the downtrend at the beginning of July, it has been forming a downward wedge. In fact, the movement witnessed in the last two weeks has been an ascent of the index within the wedge itself. Furthermore, even the limited buying volumes in comparison to the selling volumes of the index indicate the lack of buying pressure in the index.
We have also analysed the Relative Strength Index (for a 14 day period) in order to signal out any potential divergence, overbought or oversold pressure. Consequently, as it can be seen in Graph 4 - there are no such aspects highlighted by the RSI and it seems to be in a neutral position. Hence, we deduce that the index at large is in a distinct bearish trend.
Graph 5: Exxon Mobil downward trend (Investing.com as on 11/10/2020)
Graph 6: Valero Energy downward trend (Investing.com as on 11/10/2020)
Graph 7: Chevron Corporation downward trend (Investing.com as on 11/10/2020)
Next, in order to consolidate our viewpoint, we have analysed BP’s three most significant competitors both in terms of operations and size. These are Exxon Mobil, Valero Energy and Chevron Corporation. As expected, the price action movements of all of these three companies have been in sync with the movement of the wider index. We believe this to be a particularly important observation as one can deduce this to be symbolic of the fact that there are no important individual drivers affecting the performance of a single firm in the sector.
To conclude, we believe that the energy sector has witnessed a fatal blow in the short to the medium term which translates directly into a negative outlook for the immediate future as well. As far as the factor drivers are concerned about, we believe that the recent slump in the price of oil and the recent volatility witnessed within natural gas in the commodity space have all played their part towards this bearish trend.
Additionally, even though firms competing in the industry have emphasized the need to transition to alternative energy sources, we believe they have proved to be extremely static (i.e. they have been unable to diversify their product offerings when it comes to renewable energy). Potentially because of the high degree of innovation costs involved in inducing this cataclysmic shift, because of which the immediate future of the industry looks subdued.
Technical Outlook for the Stock
Support and Resistance Analysis
Graph 8: Support and Resistance Levels for BP (Investing.com as on 11/10/2020)
As on 9th October 2020, BP’s share price closed at £2.22 after having fallen by 0.0008% since its open. The share price of the stock has been trading in a downward corridor since mid-August. As per our analysis, the immediate resistance for this stock is at £2.22 and the immediate support is at £2.12 (as highlighted by the yellow rectangles in Graph 1). Historic price-movement suggests that the stock is currently in a consolidation period within an extended inverted flag pattern, and is currently testing its immediate resistance level, as seen by the shooting star pattern on the 9th of October.
Moreover, other than the immediate support and resistance levels, we believe that the £2.38 and £2.46 are crucial levels on the upside (as highlighted by the orange and blue rectangles on the upside in Graph 1). We believe that a strong signal of a trend reversal would be revealed if the share price were to convincingly break out of these levels but recommend holding this stock for the time being. However, if historic data holds true, we expect this stock to break through its immediate line of support following this consolidation period because of which we have a bearish outlook in the short-medium term.
Trend and Pattern Analysis
Graph 9: Trend and Parabolic SAR Analysis for BP (Investing.com as on 12/10/2020)
In order to establish the trend of the stock from a short to medium term point of view, we decided to observe the stock for a 6 month timeframe. As can be seen in Graph 9, the lower highs and lower lows clearly identify an ongoing downtrend, which started in the first week of August. In particular, the first high was established at £3.66 on the opening of the 6th of June, with similar ones being established at £3.15 and £3.11 on the 27th of July 2020 and 12th of August 2020, respectively.
Subsequently, their respective ‘lows’ were established at £2.86, £2.75, and £2.14, on the 10th of July 2020, 31st of July 2020 and 2nd of October 2020 respectively. The robustness of the trend would further be enhanced if another higher lower low was to be created following the last one, but nonetheless the green line in Graph 9 clearly signifies the trend of the stock. In fact, as we would highlight this later - the recent buying pressure witnessed in the stock is more likely to be viewed as a consolidation, highlighting the fact that the stock is most likely on a path of correction.
In order to further this point, we have plotted the Parabolic SAR that determines the direction the stock is moving in (remember that this is usually a better indicator for in a trending market rather than a range point market). Whenever the candlesticks are below the dotted line, it implies a downward trend and vice versa. In that respect, further scrutiny of Graph 9 makes us realise that indeed the past few reversal indications in case of BP have more been like corrections rather than significant trend reversals - primarily because of their short lived nature.
Having said that it is only very recently that the indicator gave a reversal indication, hence highlighting that we may witness a brief period of uptake characterised by some buying in the stock because of which our recommendation is to hold the stock in the immediate short term.
However, in the short-medium term we continue to have a bearish outlook for the stock.
Graph 10: Inverted flag formation in BP (Investing.com as on 12/10/2020)
Having established the trend of the stock, we next move towards understanding whether or not there are any significant patterns dominating the price action. Further analysis makes us realise that the trend of the stock has been hugely dominated by an inverted flag pattern. This pattern is defined through sequential periods of downward trends (that forms the pole of the flag - as highlighted by the black lines in Graph 10) in the stock price followed by immediate periods of consolidation (as highlighted by the purple colored channel).
An important characteristic of both of these elements of the pattern is the differences in volumes at the time of their formation. As it is, the volume during the formation of the pole should usually outdo the volume during the formation of the flag.
The stock has seen three periods of consolidation: from the 1st of September till the 10th of September, the 23rd of September till the 29th of September, and from the 5th of October until the 10th of October (the time of writing this report). Consequently, although this downtrend is most likely to continue, we believe that the price action is in the middle of its consolidation phase which furthers our recommendation of holding the stock at the moment. In fact, our advice would be to only go on the short side once a confirmation in the form of a breach of the immediate support level occurs.
Moving Average and MACD Analysis
Graph 11: 20-days and 5-days Moving Average & MACD Analysis of BP (Investing.com as on 12/10/2020)
Plotting the 20-days and 5-days Simple Moving Average indicators allow us to observe that the negative crossover that the stock established on 18th August 2020 has been particularly strong which the price action has been trailing ever since. Additionally as highlighted before as well, the 20-days SMA has a particularly strong role in dictating the price action.
Resultantly, we believe that the recent consolidation is a movie dedicated to testing the 20-days MA. However, in the larger picture we still believe that the price action will continue to trail downwards unless and until both, the immediate resistance is breached and the sustainable positive crossover is established between the two.
However, the Moving Average Convergence Divergence indicator provides an extremely interesting insight which combined with volume levels, provides us with a better perspective of the momentum embedded within this trend. In order to provide some contextual insight, what we see in the upper row of the MACD graph is the 26-days and 12-days Exponential Moving Average moving almost together, with the difference between them being represented by the vertical red lines.
The trend tends to accelerate when the two EMAs cross, either in the upward direction (i.e. when the 12-day EMA overtake the 26-day EMA) as it did on 5th August, 2020 or in the downward direction (i.e. when the 26-day EMA overtake the 12-day EMA) as it did on 18th August, 2020 and on 18th September, 2020.
These signals work best when these crossovers are accompanied by high volumes. Keeping this in mind, it is easy to check that the very recent crossover in the MACD indicator, which might have initially been considered a bullish sign, isn’t however backed with enough volume because of which we conclude that indeed the recent uptake is more of a correction rather than a complete trend reversal and on a whole, the stock continues to be a downtrend.
Bollinger Band Analysis
Graph 12: Bollinger Band Analysis for BP (Investing.com as on 11/10/2020)
As it can be seen in the Bollinger Band analysis, a pair of two consecutive red candlesticks breached the lower bound of the band (i.e. the -2 SD bound) two times in the last three months that indicate an extremely bearish sentiment towards the stock (as highlighted by the yellow boxes in Graph ). We observe that although on a cumulative basis, the price tends to trail the downtrend after such a breach, it almost every time followed by a short phase of consolidation that entails some buying and testing of the 20-day MA.
Resultantly, although in the medium to long term we have a bearish outlook for the stock, we believe that in the immediate short term we may witness this consolidation phase characterized by some buying to continue. Hence, this lies in tandem with our recommendation of holding the stock, waiting for the 20-day MA to be tested as well as a confirmatory indication to occur before going on the short side.
RSI and Stochastic Analysis
Graph 10: RSI and Stochastic Analysis for British Petroleum (Investing.com as on 11/10/2020)
The first indicator in Graph 10 is the Relative Strength Index (RSI) of BP for a 14-day period. The 41.20 level has been a crucial support turn resistance for the stock. Although, there are no red flags in principle that are being flagged by the RSI at the moment, historic movements in the index suggest that the stock is witnessing buying power after having dwindled in the oversold region for the past 2-3 weeks. As it was the first time that the stock entered this region ever since the pandemic, this furthers our case of witnessing some level of correction in the form of buying.
Even the movements within the stochastic oscillator indicate the same.
The stock has been in the oversold region for a prolonged period of time and recently entered the neutral region around 7th-8th October, 2020. Recent historical analysis suggests that the stock has found it tough to sustain above the 20 lower bound.
However, we believe that the selling pressure has been extended and the RSI entering its normal range should ideally be a cue for some buying pressure to be witnessed.
News Event Box
In its annual outlook on the oil and gas markets, BP was the first oil and gas supergiant to argue that even in a best-case scenario, the demand for oil and gas would never reach its pre-COVID-19 levels. It indicates that demand will likely fall by 10% in the next decade, and by 50% across the next two decades.
As a result of investor fears generated from BP’s annual outlook, BP’s share price dropped to £23.24, a 25 year low.
As a result of COVID-19, the price of oil, gas and other energy outlets have fallen significantly, which has impacted BP’s share price negatively. Following this, BP reduced their dividend, but their dividend yield is still 7.27% a year, showing that this stock is severely undervalued currently.
BP’s future strategy involves a net zero ambition by 2050, planning to invest 10 times more in low carbon measures, as well as increasing its production capacity of developed renewable energy from 2.5 gigawatts (GW) in 2019 to around 50 GW by 2030. Forging a strategic partnership with Equinor, an established petroleum refining company, they plan to develop offshore wind projects in the US.