Here’s how BP can hit 800p

If you thought rebuilding BP's dividend depended on oil field discoveries and higher production targets then you may have to think again. It appears that sandwiches, beer and ready meals are just as important.

Having run the rule over BP's recent 2021 strategy presentation, analysts at Barclays were particularly taken by the company's bullish forecasts for its downstream division, which covers fuels, petrochemicals and lubricants.

They noted that over the next five years BP has targeted an increase in downstream pre-tax cash flows of between $3.5 billion and$4.5 billion (£2.8bn-£3.6bn) from 2016 levels, or $800 million (£647m) a year.

One way Barclays sees for BP to increase per barrel profitability is for it to boost its share of non-fuel earnings. That's where the sandwiches come in.

As recently disclosed by Tufan Erginbilgic, BP's chief executive of refining and marketing, petrol station forecourts tend to make more money from selling food than fuel.

This is one reason why BP recently made its biggest downstream acquisition in some 15 years when it bought more than 500 petrol stations in Australia for 1.3 billion US dollars (£1.05bn).

It is looking to speed up the roll-out of its forecourt partnership with Marks & Spencer, which it will also try and replicate in other key global markets. The tie-up with M&S Simply Food, which began in 2005 with a store near the Hammersmith Flyover, now amounts to more than 220 sites.

BP plans to increase the number of M&S stores it owns and operates to 300 by early 2018. This should cover about a quarter of its UK petrol station estate.

A slide from the BP presentation showed profitability at those sites with BP M&S convenience stores as being twice the industry comparator.

About two-thirds of the downstream business is accounted for by fuels, with this business now much more skewed towards marketing than refining than it was 10 years ago. Since 2005 refining capacity has fallen 38%, with the number of refineries in which BP has interests falling from 19 to 11.

The team at Barclays has stuck to its BP price target of 625p for the timebeing, given the need to see how the 2021 strategy pans out. However, the note today lifts the upside case on the stock from 740p to 800p, assuming that oil prices recover to about $85 a barrel on average over the long term.

"We see two potential paths to this upside case. First is the incorporation of the full downstream guidance into our numbers. The second is the incorporation of approximately one-third of the upside combined with a recovery in the oil price by 2020 towards our upside case of $85/bl."

Barclays said: "The coming five years should be transformative for BP.

"In the upstream, sector leading volume growth ambitions of 5% pa to 2021 look achievable and combined with greater efficiency should yield much improved results.

"Yet it is the plans for the downstream arm that have the potential to deliver the biggest positive surprise to the market, with our own pre-tax cash flow forecasts for the division some 50% below the top end of BP's numbers presented in its latest strategy plan."

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