Where next for BP shares after Big Oil’s profits bonanza?

Big Oil valuations have surged after a results season of record profits and bumper shareholder returns. Where do City analysts think BP shares will go next?

BP (LSE:BP.) shares have been backed to top 600p for the first time since 2018 as City analysts see further upside for oil supermajors after a record-breaking earnings season.

Goldman Sachs today upped its target price on BP by 30p to 640p after the UK oil giant recorded $8.5 billion (£7 billion) of profits for the second quarter alongside a 10% dividend hike. It was the sixth quarter in a row that BP had beaten City consensus for adjusted net income, having accelerated from close to zero seen in the final quarter of 2020.

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The FTSE 100 company, whose £76 billion market capitalisation is less than half the value of Shell (LSE:SHEL), also surprised by pledging to buy back a further $3.5 billion (£2.9 billion) of its shares.

BP’s inclusion on Goldman’s “conviction buy list” came as analysts at SocGen today raised their price target by 30p to 570p and UBS highlighted the potential to reach 490p.

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Bank of America reiterated its 500p target price today, but has a “neutral” recommendation as its analysts see the potential for BP’s rivals to deliver greater shareholder returns in future.

BP shares lifted another 5.7p to 409.5p today and have risen 12% since mid-July, but today’s note from Goldman Sachs suggests a further 57% upside.

A Brent crude price above $100 a barrel has fuelled the industry’s profit bonanza, leading to record quarterly earnings from Shell, Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX). In the case of Exxon, its net income figure quadrupled to $17.9 billion (£14.7 billion) and was accompanied by a pledge to buy back $30 billion (£24.6 billion) of shares in 2022/23.

As well as benefiting from higher prices and tight cost controls, Exxon’s boss Darren Woods pointed out his company reaped the benefit from investments put in place several years ago and “sustained through the depths of the pandemic".

A weakening global economy means these figures may be as good as it gets in terms of industry profits. However, a decline in oil prices is far from certain after UBS today reiterated its forecast for a Brent crude price of $125 a barrel up to the middle of next year.

Its Global Wealth Management team said: “While oil demand from OECD countries has been lacklustre lately, it remains strong in non-OECD countries including China, India and Mexico.

“We continue to believe China’s economy is recovering from the trough in Q2, albeit in a bumpy manner.”

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Announcing earnings of $11.5 billion (£9.4 billion) last week, Shell boss Ben van Beurden said tight supply conditions mean it’s more likely crude goes higher than lower.

Today’s Brent crude price of $100 a barrel compares with what BP describes as its “cash balance point” of $40. Its conversion into free cash flow in the most recent quarter improved even more strongly due to lower taxes and another light quarter for capital expenditure.

The share buyback guidance surpassed BP’s previous quarter’s $2.5 billion (£2.1 billion), but Bank of America’s believes momentum has now peaked as it forecasts a downward sloping quarterly run-rate of $2 billion (£1.6 billion) next year before falling further into 2025.

The Bank’s analysts said today: “We believe more specific capex commitments are yet to follow most of its 2030 targets from recent investment announcements in hydrogen, EV charging as well as BP's recently secured offshore wind licences.”

Bank of America notes that BP’s overall debt figure stands at a very similar level to Shell’s, despite being half the size in terms of market capitalisation. The bank said its preference remained for shares in Shell and TotalEnergies (EURONEXT:TTE) over BP.