LONDON (ShareCast) - (Sharecast News) - RBC Capital Markets upgraded BP on Monday to 'outperform' from 'sector perform' as it said the current commodity price environment provides another chance to deleverage.
The bank, which left its price target at 700p, noted that it has been critical of BP's capital allocation over recent years, across both its transition efforts and decisions made in its core business.

"Looking forward, another unexpected windfall gives BP another chance to put the business on firmer footing," it said.

"Given material damage on energy infrastructure in the Middle East as well as material inventory drawdowns across oil products, we see a period of prolonged higher commodity prices supporting BP's investment case. We see BP's leverage being comparable with peers by 2027E, paving the way for a complete removal of the hybrids in the future."

RBC said new management will need to maintain discipline "and try not to get FOMO" as peers continue, and even raise share buybacks.

"We think the company would be best served over the long term to continue debt reduction for at least 12-18 months."

At the same time, it pointed out that BP has a number of projects in execution, as well as some potentially interesting exploration opportunities which should provide more depth in the growth hopper.

RBC said that farming down its Gulf of Mexico assets could help free up capital and enhance near-term free cash flow.

"The ongoing presence of an activist in Elliott should also keep management on the straight and narrow, in our view," it said.

It also argued that incoming chief executive Meg O'Neill will likely now put her stamp on the executive team. "With one departure already announced, we expect further changes across BP's upper management over the coming months.

"In our view, bringing in more external talent would enhance the perception of 'real' cultural change at BP. We think investors would also need confidence that changes at the top are set to permeate through the organisation."

At 0940 BST, the shares were up 0.5% at 538.40p.

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