Wells Fargo Upgrades BP to Overweight and Swaps Exxon Out on Debt Reduction

Wells Fargo has upgraded BP (LON: BP.) to Overweight from Equal Weight and raised its price target to $57 from $48. Analyst Sam Margolin made the call in a research note issued last night.

The $9 increase in the target is 18.75%, or about 19%. The figure is in US dollars, so it does not translate directly into a London share price in pence.

The upgrade comes with a switch. In the same note, Margolin cut Exxon Mobil (XOM) to Equal Weight from Overweight. The Exxon price target is unchanged at $182, which suggests the change is about preference between the two rather than a lower view of Exxon’s value.

Wells Fargo’s reasoning rests on valuation. According to the note, relative share valuations now favour BP, given the company’s accelerated debt reduction and resource development.

The bank also believes commodity and trading conditions continue to pull forward BP’s $14B debt target. In Wells’ view, that gives the company capital allocation flexibility, meaning how it divides cash between paying down debt and other uses.

Wells does not write Exxon off. It says that company could still see upside because of “strong business conditions”, but concludes that BP shares offer more.

For UK investors who hold or are weighing BP, the note is an endorsement from a large US bank that ties the case to balance-sheet repair and capital allocation flexibility. It is one analyst’s view.

The test for the thesis is BP’s progress towards the $14B debt target, which Wells expects market conditions to bring forward.