Scotiabank upgrades BP to Outperform on valuation gap to peers and potential for Bumerangue Block discovery to transform upstream profile.

Scotiabank upgraded BP to Outperform with a price target of $42, citing a valuation gap relative to peers, the Bumerangue Block discovery, cost reduction efforts, and the stock's attractive valuation as catalysts. The analyst believes the shares will narrow the valuation gap and sees the discovery and cost reduction efforts as key drivers.

Scotiabank has upgraded BP to "Sector Outperform" from "Sector Perform," citing the potential of the company's Bumerangue Block discovery to reshape its upstream business. The bank also raised its 12-month price target for the stock to $42 from $34, with shares closing at $34.31 on Tuesday. In its note, Scotiabank stated that the discovery "could transform the company’s long-term upstream profile, addressing one of investors’ biggest concerns" [1].

The firm outlined three key reasons for its more bullish stance. First, the Bumerangue Block could be a game changer for BP’s production outlook. Second, ongoing cost reduction efforts "should accelerate in the coming quarters," providing additional support to earnings. Finally, Scotiabank sees further upside from drilling and testing updates expected in 2026, which "should serve as catalysts to the shares" [1].

Analysts believe the Bumerangue find has the potential to close BP’s valuation gap with European supermajor peers. Scotiabank’s view is that the development could represent a structural shift for BP’s portfolio, noting that their discounted cash flow assumptions for the Bumerangue project are now included in their valuation model [1].

Additionally, BP is exploring the possibility of partnering with Petróleo Brasileiro S.A. – Petrobras PBR to develop the Bumerangue oil and gas discovery in Brazil’s pre-salt layer. The company's CEO Murray Auchincloss said the firm is seeking a partner to advance the project, located in deepwater fields beneath a thick layer of salt [3]. When announcing the discovery, BP revealed that preliminary rig-site analysis detected elevated carbon dioxide levels in the reservoir, prompting questions about the project’s commercial viability [3]. However, BP's head of production and operations, Gordon Birrell, downplayed the concern, saying he is not particularly worried about the CO2 levels [3].

While details of the discovery’s reserves and commercial viability remain subject to further appraisal, Scotiabank’s view is that the development could represent a structural shift for BP’s portfolio. "We believe the shares will be able to substantially narrow the current valuation gap with its European Supermajor peers," the note said [1].

References:
[1] https://finance.yahoo.com/news/scotiabank-upgrades-bp-potentially-transformative-155218481.html
[3] https://ca.finance.yahoo.com/news/bp-eyes-petrobras-partnership-brazil-122300750.html