Oil major BP (BP.) could be generating $10bn of free cash flow by 2021 from its downstream business. The scope for such huge cash flows in future came out of the group's investor day earlier this week. Downstream refers to the refining of crude oil and processing of natural gas, as well as the marketing and distribution of products derived from oil and gas.

Shares in the company are up 0.9% to 465.1p in early trade on Friday as they bounce back from oil price related weakness.

WHAT ARE BP’S DOWNSTREAM OPERATIONS?

BP made the point that while half the capital employed by the business is in refining this makes up less than a quarter of profits from downstream operations. Higher return activities and products such as lubricants, non-fuel retail, petrochemicals and jet fuel make up the remainder.

The company makes pre-tax returns of 30% from its fuels marketing business – essentially its retail forecourts – with growth coming from partnerships with food brands like Woolworths in Australia and Marks & Spencer (MKS)  in the UK as well as expansion into new geographies like Mexico.

BP graphic

Source: BP

VALUATION CALL

Canaccord Genuity analyst Alex Brooks says the market may not be fully reflecting the downstream business in its valuation.

‘We estimate BP's enterprise value ex Rosneft and decommissioning is around $155bn. At most, $50bn of that is attributable to the downstream.

‘Simply taking traded peers for the elements of BP's downstream we can get north of $100bn, or an incremental 200p per share. Additionally, BP's dividend of $8bn per annum could be fully paid from free cash flow from the downstream.’


Issue Date: 16 Jun 2017