BP plc (BP, Financial), a global major integrated oil & gas company needs no introduction. The 4.4% dividend yield stock has been a value creator for years and the company is a good investment at this point of time. This article discusses the key reasons to be bullish on BP for long-term.
Fundamentals Getting Robust
For 2014, BP has a planned capital expenditure of $24-$25 billion. The company’s high capital expenditure program has translated into strong cash flow growth in the last few years. For 2014, BP expects operating cash flows of $30-$31 billion and this is 50% higher than the operating cash flow of 2011.
The company has already guided for capital expenditure of $24-$26 billion annually for the period 2015-18. With a high capital expenditure continuing, operating cash flows will be significantly higher than current levels in the next 3-5 years and will contribute to strengthening of overall fundamentals.
Another factor contributing to the company’s improvement in fundamentals has been the asset divestment program over the last few years. In 2010, the company’s $38 billion asset divestment was in relation to the company’s funding needs for litigation and growth. However, the current asset divestment program is to boost shareholder returns and to focus on the company’s core assets.
By the end of 2015, BP plans an additional $10 billion in divestment and the company intends to use these proceeds for shareholder distribution through share buybacks. This will result in significant value creation for shareholders. Even beyond 2015, BP expects to divest $2 billion to $3 billion of assets annually and this plan will continue to boost liquidity and enhance shareholder value creation.
The company already expects operation cash flow to be at least $30 billion for 2014 as compared to a capital expenditure plan of $25 billion. This makes BP free cash flow positive. This is important as BP can continue to increase its dividend payout to shareholders.
Strong Turnaround In Refining Quality
In the last 13 years, BP has exited 13 refineries. Currently, the company has 9 operated refineries and 5 non-operated refineries. As the chart below shows, the company’s average refining scale is now industry leading with a much better Nelson complexity index as compared to the year 2000.
Currently, the company has one simple, but large refinery at Rotterdam. Excluding this refinery, the company’s Nelson complexity index would be above 10 and in line with the best in the industry among peers.
The importance of talking about this is the fact that the company’s refining margins have been improving and will continue to improve as it makes strategic divestments of non-complex refineries.
Bullish on Russia Prospects
Russia is one of the world’s largest oil and gas producers and a country where BP has a long and successful track record. In the near-term, the tension in the region might be a concern. However, the company’s assets will provide strong shareholder returns over the long-term.
For 2013, BP had a net production of 961mboepd in Russia as compared to 163mboepd for Shell (RDS-A), 46mboepd for Exxon (XOM, Financial), 192mboepd for Total (TOT) and 6mboepd for Statoil (STO). Therefore, BP is the biggest operator in Russia and is way ahead of other oil & gas major companies.
Conclusion
BP currently offers a dividend yield of 4.4%, which is sustainable considering the fact that the company expects strong operating cash flow over the next few years. BP will also create additional shareholder value through divestment and share repurchase.
Further, BP has big assets and plans in Russia and I believe that the region can be one big value creator for the shareholders in the long-term. Over the last few years, BP has also increased its refining quality and margins. All these factors combine to make BP an investment worth considering, especially with a high dividend yield.
The stock certainly looks attractive at a current EV/EBITDA of 6 and these are attractive levels with peers such as Exxon trading at an EV/EBITDA of 7.5 and Chevron, trading at an EV/EBITDA of 6.5. Even in terms of dividend yield, BP offers a yield of 4.4% as compared to 2.7% for Exxon and 3.2% for Chevron.
In conclusion, investors can consider exposure to BP for long-term. The company will continue to generate significant shareholder value over the long-term and current valuations are a good time to buy the stock.
