Are BP shares a good investment?

Are BP shares a good investment?

28 March 2013

By Joel Hewish – Chief Financial Strategist at United Global Capital (UGC)

Are BP shares a good investment?

One stock has caught my eye recently. And NO…. it’s not because it is responsible for another major oil spill. Rather, it’s because of what it has done since that fateful day in April 2010 that has sparked the interest.

But before you scream at me for discussing such a horribly evil company, I should let you know…. I’ve already copped an earful from my closet environmental activist fiance’.

But what if I was to tell you this…….

According to the Harris Interactive report, in February 2012, the 4 most hated stocks in the US were Goldman Sachs, Citigroup, BP and AIG. Since then, however, all but BP are up substantially with Goldman Sachs +28%, Citigroup +37% and AIG +40%. BP, on the other hand, has lagged, down 11% from the same date.

The British based integrated oil and gas producer has been through the ringer in recent years and many would feel less than sympathetic towards it. But is it now time to forgive it for its past sins and buy it?

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According to Yahoo Finance, BP p.l.c. provides fuel for transportation, energy for heat and light, lubricants to engines, and petrochemicals products. The company’’s Upstream segment engages in oil and natural gas exploration, field development, and production; midstream transportation, and storage and processing; and marketing and trade of natural gas, including liquefied natural gas (LNG), and power and natural gas liquids (NGL). The company’s Downstream segment is involved in the refining, manufacture, marketing, transportation, supply, and trade of crude oil; petroleum; petrochemicals products comprising purified terephthalic acid, paraxylene, acetic acid, and olefins and derivatives, as well as provides related services to wholesale and retail customers. This segment also sells refined petroleum products, such as gasoline, diesel, aviation fuel, and liquefied petroleum gas (LPG). This segment offers lubricants under Castrol, BP, and Aral brand names to automotive, industrial, marine, aviation, and energy markets. BP p.l.c. also engages in alternative energy businesses, as well as offers shipping and treasury services.

It’s troubles have been well documented. In April 2010, a major gas explosion at BP’s Deepwater Horizon oil rig in the Gulf of Mexico lead to the death of 11 rig workers, a major fire and a huge environmental disaster as oil spewed from the well.

Since then BP has engaged in a program of selling off many billions of dollars worth of non-core assets and it has used that cash to fund a compensation trust, pay down debt used to cover the cost of the clean up and shore up its balance sheet, which at one stage was in big trouble.

But now, with much of the bad news known and with much of the worst behind it. Is it time to start considering BP as an investment for your portfolio?

Right now, BP trades on the US stock market for ~US$42.30. This means BP has a market capitalisation of ~US$134 billion. That is about 50% lower than it’s all-time high of almost US$80, just before the GFC, and is about 32% lower than where it was trading just before the April 2010 oil spill.

In the 4th quarter of 2012 BP made its final contribution to the $20 billion trust fund established for compensation. While the compensation case has gone back to court, with BP requesting an injunction to stop what it claims are “Fictitious” and “Absurd” claims of compensation, with compensation claims likely to reach no more than ~US$8 billion to ~US$9 billion, BP looks well placed to meet its obligations.

Financially the company is strong and getting stronger. It has a Net Debt to Equity position of 40%, it has total financial debt of US$48 billion against ~US$20 billion per annum in operating cash flow. Not to mention that operating cash flow is expected to increase to ~US$30 billion over the next couple of years. So while the total bill for the incident is likely to cost BP ~$40 billion in total, a lot of this has already been paid or provided for and cash flows are such that whatever else pops up from this incident should be handled with relative ease.

In 2011, BP re-instated its dividend at half the previous level. At the current price, however, BP offers a very attractive dividend yield of 5%+, significantly higher than its peers, with a payout ratio of around 55%. On top of that, the dividend has grown by 13% per annum since it was re-instated.

So what about its exposure to oil and natural gas prices? Well being a vertically integrated energy play it is not as exposed to falling oil or gas prices as other pure oil and gas explorers. That’s because margins can potentially improve on the down stream businesses if these two commodities fall in value. But yes it is still exposed.

Looking at valuations, this is where BP starts to get very interesting. Right now BP trades at a significant discount to Chevron & Exxon. At 1.13x book value, BP is trading at a discount to Chevron of 35% and Exxon of 52%.

Looking at BP on a Price to Sales ratio, at 0.35, this represents an even larger valuation discount to its two larger rivals with both Chevron and Exxon trading at ~1.0. That is, on a Price to Sales basis, BP could double from here and still be some 30% cheaper.

It also currently trades on a Price to Earnings ratio of 8.2x forecast earnings estimates, versus the market average of ~17x. But with operating cash flows expected to reach $30 billion in the next couple of years, that puts BP on a operating cash flow multiple of just 4.4x. That’s crazy cheap!!

More recently, BP announced a big deal to sell a major proportion of its stake in Russia’s No. 3 oil producer, TNK-BP, which will raise an additional US$12.3 billion in cash when it settles in the middle of 2013. What is pleasing about this is that BP has annouced that it will use about US$8 billion of the proceeds to buy back around 6% of its stock. Less stock means higher earnings per share and higher dividends per share.

BP appears to be sending a clear signal to the market, that is, from here on it will be very shareholder friendly.

There is strong price support around US$40 and BP appears to be building a base to move higher.

You should always do your own research, or seek the advice of your own adviser, but BP certainly looks very interesting at current levels.

If you think BP sounds like an opportunity you might want to explore further, or if you have considered investing directly in international shares before but have not known where to start, contact UGC today for a No Cost, No Obligation consultation on 03 8459 2121 or email info@ugc.net.au. We would be more than happy to review your superannuation, trust or personal investment strategy and give you the advice you need for safer and more consistent returns.

Kind regards,

JOEL HEWISH B.Bus (Bank & Fin), GDipAppFin, GCertFinPlan
Managing Director / Chief Financial Strategist
Authorised Representative No. 416387
 
The information contained in this report is General in nature and has been prepared without taking into account your objectives, financial situation and needs.

 

Joel Hewish

Joel Hewish

CEO / Chief Financial Strategist at United Global Capital
B.Bus (Bank & Fin), GDipAppFin, GCertFinPlan
Authorised Representative No. 416387
Joel is the founder and CEO of UGC.
He is a licensed financial advisor with 15 years experience assisting clients grow, manage and protect their wealth.
Joel Hewish