bp (BP)

Total return at 5 years: 6.0%/year = 1.1% appreciation + 4.9% dividend. The target price ($49) is ex-dividend; the $12 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $145 · Multiples $50) exceeds the market price ($47).

Today — fairly valued: at $47 trades ~6.2% below its value discounted to today (~$50); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($49) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$32.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($47) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-18.9%/year) than we project (2.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$5.7 bn of owner earnings in year 5 (vs ~$17.9 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on Utilidad atribuible de mitad de ciclo (P/E). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Annual reporter: year 0 is the fiscal year ended 31-Dec-2025 (bp files a 20-F and publishes its quarters on 6-K, which carry no XBRL, so there is no tagged quarter with which to build a twelve-month window). The year-0 revenue level is the real one for the fiscal year (US$192.55bn); earnings are normalized to mid-cycle, because the reported 2025 figure (US$55 million attributable) is a cycle trough with US$6.04bn of net impairments —mainly Lightsource bp and Archaea Energy— and valuing it on P/E on that basis would blow up the multiple. The anchor for the normalization is published by the company itself: underlying replacement cost profit of US$13.84bn (2023), US$8.92bn (2024) and US$7.49bn (2025), whose average is US$10.08bn. The first half of 2026 (6-K of 4-Aug-2026) brings US$8.9bn underlying against US$3.7bn in the same half of 2025, but the company attributes it to significantly higher realized refining margins and a significantly greater trading contribution, that is it is running above mid-cycle: annualizing it would mean valuing at the top of the range. Mid-cycle is set at US$10.50bn attributable (5.45% of year-0 revenue), slightly above the three-year average to recognize the 2026 half without extrapolating it. The revenue path starts at −3.5%, within the band of the trajectory (−14.4%, −8.6%, −1.1%) and anchored to the company's guidance for 2026: production of 2,180 to 2,270 mboe/d against 2,312 in 2025, capital investment of US$13.5 to 14.0bn and divestments of US$8 to 9bn, of which some US$6bn is Castrol. The shape is trough and recovery —declared as the rebound exception to the deceleration rule—: the divestment program compresses the first two years and from the third the remaining portfolio grows with volume and mid-cycle prices to 1.5% by year 5. Margins improve from 5.45% to 6.0% on the cost reduction program and the clean-up of the portfolio, without crediting in advance the target of a return on capital employed above 16% by 2027. Maintenance capex is taken equal to total capex: with flat or falling revenue, the Greenwald formula leaves growth capex at zero, and in a reserves business replacing depletion is maintenance —the proved reserve replacement ratio was 90% in 2025, that is the investment did not even fully replace the base—. The tax rate is the underlying effective rate the company publishes for 2025 (42%); the 6-K reports 33% for the first half of 2026, on changes in the geographic mix of results. The board suspended the buyback in the fourth-quarter 2025 results and allocates the entire surplus to the balance sheet while net debt —US$22.3bn at June 2026— remains above the target of US$14 to 18bn for 2027 (20-F and 6-K of 4-Aug-2026); the share count stays flat at 2,562.9 million and the cash surplus accumulates on the balance sheet rather than being imputed to buybacks.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $49 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $47, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $49 in 5 years plus $12 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $50. Against the current market price ($47), the margin of safety is 6.2% (trades below the maximum → there is margin) and the total return at that price would be 6.0% annually.

• Multiple on normalized profit. 11× on mid-cycle profit of US$10.5bn, at the low end of the integrated oil major band.
• Composition of the return. The base case's total return is +6% annually, with +5% from dividends and +1% from price: the dividend contributes more than half.
• Dependence on normalization. The entire verdict hangs on mid-cycle profit: on the 2025 reported figure the multiple means nothing, and on an annualized first half of 2026 the stock would look cheap for the wrong reason.

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (126%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on capital. 13.5% on invested capital normalized to mid-cycle, above the 10% bar but with no cushion, and 7.7% on the reported result of a year with impairments.
• Earnings quality. Operating cash flow of US$24.49bn against attributable profit of US$55 million shows just how much of the impairments are accounting, not cash; free cash flow of US$9.99bn is the number that matters.
• Predictability. Low: the result depends on Brent, gas and the refining margin, and adjusting items moved US$5.89bn adverse before tax in a single fiscal year.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

The engine of an integrated major is volume times price at every link: production of 2,312 mboe/d sold at market prices (average Brent of US$69.10/bbl and Henry Hub of US$3.52/mmBtu in 2025), 1,440 mb/d of crude processed monetized against the refining marker margin (US$12.8/bbl in 2025, 19% above 2024), and 1,113 mb/d of fuel sold at retail. Volume is shrinking on divestments and base decline; what moved the 2026 result was price — the refining margin and trading — not volume.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (31-dic-2025): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Volume. Production went from 2,358 to 2,312 mboe/d, with 2026 guidance of 2,180 to 2,270: volume is shrinking on divestments and base decline.
• Reserves replacement. 90% in 2025, against an average near 50% over the two prior years: a marked improvement, though still below the 100% that would maintain the base.
• Reinvestment runway. Capital expenditure lands at US$13.5-14.0bn in 2026 — above original guidance, on the decision to defer partial divestments of assets — and the company prioritizes debt and distributions: growth is not where the capital is going.

• Relevant in 10 years (recurrence). Oil and gas will keep being used for decades, and bp's portfolio is global in scale. The risk is not demand for the product but bp's relative position within the sector.
• Pricing power. None: it is a price-taker on a commodity. The only levers it controls are cost and trading.
• Moat and its direction. Narrow and eroding: production declining, the portfolio shrinking through divestments, and US$6.04bn of impairments on what was built over the prior decade.
• Cyclicality. Intrinsically cyclical. Underlying profit went from US$13.84bn in 2023 to US$7.49bn in 2025, and the first half of 2026 already stands at US$8.9bn: pure commodity and refining-margin cycle.
• Scale and integration. 61 countries, 6,191 mmboe of proved reserves, 1,440 mb/d of crude processed and 1,113 mb/d of fuel sold at retail.
• Cost advantage. It does not have one relative to peers: 13.9% return on capital employed against its own target of more than 16%.
• Trading capability. The company names it as one of its three sources of advantage, and in 2026 it delivered a significantly larger contribution; it is real but volatile and hard to audit from the outside.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net debt / EBITDA 0.5x
• !Interest coverage (EBIT / interest)4.3x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 126% of ROIC
• !Value creation (ROIC − 10% bar)+4pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.8x — no over-investment
• –Float / working capitalNeutral WC
• –Dilution (SBC % of revenue + shares)no data

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Debt. Net debt of US$22.2bn at year-end 2025 and US$22.3bn at June 2026, above the company's own target of US$14 to 18bn for 2027, with finance costs of US$5.11bn a year.
• Distribution coverage. Dividend of US$5.1bn plus buybacks of US$4.5bn against free cash flow of US$9.99bn: distributions take up nearly all of it, and debt reduction depends on divestments.
• Liquidity. Cash and equivalents of US$36.56bn at year-end 2025 and divestments guided at US$9 to 10bn for 2026: liquidity is not the problem.

• Alignment and ownership. No controlling shareholder or known material executive ownership; bp does not file a proxy statement on EDGAR, so holdings detail is not available.
• Candor. Executive leadership acknowledges in writing that performance in recent years fell short of the company's own expectations and that too much value had been written off: it is the language of someone owning the mistake, not the language of a wonderful future.
• Capital allocation. The track record is poor — US$6.04bn of net impairments and losses on sale in 2025 on investments from the prior decade —; the correction underway (US$20bn of divestments, lower capex, focus on what performs) does not yet have a full execution cycle behind it.

• Motivated sellers on a verifiable track record of value destruction: US$6.04bn of net impairments and losses on sale in 2025 on investments from the prior decade — US$5.4bn of impairment, mainly Lightsource bp and Archaea Energy — after having sold the US onshore wind business and halted hydrogen and carbon capture projects. The market stopped paying for the low-carbon portfolio and has not yet started paying for what replaces it.
• Missing buyers from a corporate leadership transition: executive leadership changed in December 2025 and the new chief executive only joined on April 1, 2026, with the board chair also appointed in 2025. A five-priority plan without a full execution cycle behind it is hard for an institutional investor to underwrite.
• The reported 2025 profit (US$55 million attributable) makes any multiple on the year's result look absurd, and automated screens read it that way: the business is hidden behind an accounting profit collapsed by impairments that do not consume cash.
• Net debt of US$22.2bn above the target of US$14 to 18bn ties up part of the flow to pay down debt instead of distributing it, and buybacks have already been cut from 1,238 to 836 million shares.

A disclosed post-fiscal-year event: the August 4, 2026 6-K reports a strong recovery the 20-F cannot capture — attributable profit of US$7.8bn in the first half against US$2.3bn in the same half of 2025, underlying profit of US$8.9bn against US$3.7bn, and operating cash flow of US$13.7bn against US$9.1bn — alongside the sale of the Gelsenkirchen refinery, the retail business in Austria, and the intent to sell the UK North Sea business and Archaea. The company attributes the improvement to significantly higher realized refining margins and a significantly larger trading contribution: it is a level above mid-cycle, so it enters as upside rather than as the base case.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -5%/year (-22% total): the margin of safety protects the downside. The bull (+15%/year, +102% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Commodity cycle. Every dollar per barrel of the refining marker margin moves US$450 million of profit before interest and tax, per the company's own disclosure.
• Cleanup execution. US$20bn of divestments underway: selling well or selling poorly is the difference between releasing value and destroying it.
• Geopolitics. Operations in 61 countries, with the Middle East disruption already affecting 2026 production guidance.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: narrow moat, eroding.

• Peter Lynch Growth at a reasonable price (GARP)

  A cyclical growing 2% at a PEG of 5.7 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 16% (EBIT/EV) + ROIC 14% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -19% vs our 2%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -11%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, eroding; sources: efficient scale, cost advantage, intangibles → fails the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -19%, within what we project (2%) — the story squares with the numbers.