Could BP shares hit 700p? Here’s what I’m expecting

BP (LSE: BP.) shares have been on a decent run recently. With oil prices breaking through $100 a barrel, it’s not hard to understand why. Yet the company’s own chief executive has made it clear that the firm is no longer an oil super-major, having fallen well behind its peers.

That leaves investors with some difficult questions. Can the CEO deliver on her key priorities? And can she make the business more resilient when oil prices inevitably fall?

For me, these are crucial questions when considering where the shares could go from here. A re-rating towards 700p is possible, but I think it needs to prove that it can become a stronger and more resilient business first.

So, what am I expecting from BP — and what would need to happen for the shares to reach 700p?

A simpler BP

The CEO has laid out five priorities, but two stand out to me: strengthening the balance sheet and simplifying the business.

BP needs to reduce its financial obligations and get its balance sheet more in line with European peers. That includes managing its hybrid debt, while making sure more of the cash generated by the business can be returned to shareholders.

At the same time, the company is shedding assets that no longer fit its strategy. It has sold its German refinery, is looking to offload Archaea Energy and its North Sea operations, and is reportedly close to selling Lightsource bp.

That should leave it increasingly focused on the assets where it believes it can generate the best returns. And that, for me, is where the turnaround story looks extremely exciting.

Where the returns could come from

BP has some significant assets in its portfolio, particularly in the US and upstream.

Take bpx in the US. Production reached 545,000 barrels of oil equivalent a day in the second quarter, with output continuing to grow. What is particularly impressive about these assets is their short-cycle nature. For every dollar of capital it invests there, the assets begin generating revenue relatively quickly.

Then there is Kirkuk in Iraq. BP has brought in ConocoPhillips and Türkiye’s state-owned TPAO as partners, while retaining a 43% stake. The initial development covers more than 3bn barrels of oil equivalent, with further exploration potential. And the Bumerangue discovery in Brazil provides it with a similar opportunity to share risk with partners.

These are the kinds of assets I want BP to concentrate its capital on: businesses capable of generating strong cash flows today, while providing opportunities to grow production tomorrow.

Valuation

With a trailing price-to-earnings ratio of 21.8, the shares don’t look cheap on paper. But IFRS earnings have been depressed by write-downs across its renewables business. I think adjusted earnings, putting the shares at 9.3 times earnings, provide a much more useful measure of valuation.

For the shares to re-rate towards 700p, oil doesn’t need to remain near $100 for a prolonged period. What matters more is whether management can strengthen the balance sheet, improve returns and focus capital on its best assets.

Personally, I’m buoyed by the no-nonsense approach of the new CEO. The path ahead won’t be easy, but I think the risk-reward favours a long-term approach. That’s why I’ve been steadily adding to my position.

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Andrew Mackie owns shares in BP.