The Future Ahead
British Petroleum has restructured its downstream portfolio and should be in the final phase of starting its Whiting refinery, which will generate an annual cash flow stream of well over $1 billion. In addition, the company is expected to maintain its annual exploration spending in the range of $2.5 billion to $3 billion (about two times the average level in recent years) while it plans to complete about 20 deep-water exploration wells (up from nine in 2012).The company has now completed four wells in Brazil, the North Sea and India where it made a significant gas condensate discovery in the KG D6 block.
Moreover, British Petroleum currently has 11 more exploration wells in progress in the GOM, Brazil, Angola, Egypt, Jordan, India and Indonesia. On the other hand, the company acquired new acreage in Norway, Brazil and China while being awarded two blocks in the Barents Sea.
Relative Valuation Looks Attractive
British Petroleum's implied reserve value (IRV), maybe the most relevant value indicator for oil and gas companies, is roughly $11.55 per barrel of oil equivalent (boe), by far the lowest in the sector. As a matter of fact, the IRV for large Exploration & Production (E&P) oil companies is roughly $32 per boe. The discount remains visible when we take more general valuation metrics. British Petroleum trades at 2014 8 times P/E while ExxonMobil (XOM) — Chevron (CVX) — trade at 10.8 and 10.2 times P/E, respectively.
The discount is also visible when we look at cash dividend yields. British Petroleum's shares yield is 5% while ExxonMobil's and Chevron's yield are 2.88% and 3.34%, respectively. On top of a respectable growing cash yield, under its $8 billion authorization following the TNK-BP sale, British Petroleum repurchased $1.9 billion of its stock during the second quarter and over $500 million in July.
All the aforementioned exploratory activity added to having finally ended a very long and painful restructuring process should call investor's attention towards British Petroleum's shares. Of course the company's steep valuation discount to large E&P peers gives me the very much-needed margin of safety that I need to invest in a company which is still embroiled into a very tough legal battle. Overall, I think there is a future for British Petroleum. Like so many other investors such as Seth Klarman, James Barrow, Charles Brandes and Ray Dalio, I will stay long the shares as much as needed. Meanwhile, I can pocket a very generous growing cash dividend yield.