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BP (LSE:BP.) Stock Still Looks Discounted On Future Cash Flow

Simply Wall St · 2d ago

BP has delivered a strong 5 year share price run, and with fresh corporate moves in both biofuels and US shale, the real question for investors is whether the current price can still be explained by the cash it is expected to generate.

  • BP has returned 100.7% over the past 5 years, which puts the spotlight on whether that climb is in line with the value of its underlying cash flows or has moved ahead of them.
  • Talk of selling the Brazilian biofuels unit and interest in Devon Energy's Eagle Ford assets point to a reshaping of the portfolio that can alter both the timing and stability of future cash generation.
  • If you'd rather focus on earnings, this one's for you. See why BP's 21.2x P/E tells a different valuation story.

The stock's next move may depend on whether BP's current share price lines up with what a Discounted Cash Flow (DCF) view of its future cash streams implies.

If you want to stress test this same cash flow question beyond BP, you can line it up next to other companies using 6 high quality undervalued stocks

Is BP Still Cheap on Cash Flow?

The Discounted Cash Flow (DCF) model here focuses on what BP can return to shareholders through future free cash generation. Latest twelve month free cash flow sits at about US$13.8b, and the projections used in the DCF assume that this cash stream eases back over time rather than climbing aggressively, with the long term phase reflecting relatively steady, mature output.

On those inputs, the DCF suggests an intrinsic value that is substantially above the current share price of £5.61. Because the recent interest in Devon Energy’s Eagle Ford assets could change both spending needs and future US$ cash flows, that deal talk helps explain why the market may still be hesitant even though the model points to a higher worth on current assumptions. Find out what BP could be worth using our Discounted Cash Flow (DCF) estimate.

The BP Narrative: What Would Justify Today's Price?

Narratives pick up where the DCF puzzle leaves off for BP. They explain which combinations of future growth, profitability and earnings power would correspond to a value that is meaningfully higher or lower than today’s share price. Each narrative focuses on the assumptions underlying its fair value view so you can track those against BP’s actual results on Simply Wall St’s Community page as they are reported.

One of the top community narratives on BP: 11% undervalued

"Portfolio high grading and disciplined capital allocation via active divestment of lower quality or stranded assets and focus on best in class project returns…"

Discover why this Narrative puts BP at 11% undervalued.

BP's valuation is only one piece of the decision

Price and cash flow models tell only part of the story for BP, since the research also highlights specific concerns that investors may want to weigh before committing fresh capital. Take a closer look at 2 warning signs before settling on a valuation.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.