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Is It Time to Buy BP?

October 22, 2013 | About:

I have been long British Petroleum (NYSE:BP) for over one year now. The market did not reward my decision. Year-to-date, the shares are up by just 3%, under-performing the S&P 500 by over 15%. That said, after more than $36 billion of divestitures to cover the oil-spill costs, I think the shares should finally start gaining momentum in a moment when a recent settlement between Haliburton (NYSE:HAL) and the Department of Justice (DOJ) should help British Petroleum's legal position in the legal battle that followed the 2010 Deepwater Horizon disaster.

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 (NYSE:XOM) Chevron (NYSE: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.

Bottom Line

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.

Rating: 3.5/5 (6 votes)


Sdsgrp - 4 years ago    Report SPAM

Only the first four sentences of the last para (Relative Valuation Looks Attractive) is legible. Rest seems to be justs words that does not make sense. I found the same with the article related to why buy IBM now. Unsure whether this is more of problem at my end or with the site. Thanks.
Imsearchingforthewrongguy - 4 years ago    Report SPAM
I got the same issues here. right when it starts with the pe ratio's on bp and exxon the text gets garbled with some sort of code.
Gurufocus premium member - 4 years ago
This article is fixed.

We will look into the problem.
PFlyer - 4 years ago    Report SPAM
As a modest investor having recently purchased a good number of shares of BP, I have to agree with this article. The other positive aspects that were noted help reinforce my feelings that hopefully I made the right decision. There has been much negativity associated with BP in recent years, but my faith in BP came from what I knew. I worked for a major contractor on the $4.3 billion Whiting, IN project for several years. The scope of this project was massive with the primary focus to process the heavy sour tar sands crude from Alberta Canada. I don’t expect the Keystone pipeline to ever be approved by the current administration. It is my understanding that this leaves BP Whiting and the Conoco Phillips Wood River unit at Roxana, IL the only refineries with current direct pipeline access to the Canadian tar sands.

I assume the article’s mention of the expected positive cash flow of $1 billion is for Whiting alone. I expect the overall capacity of this facility to be greatly increased beyond original estimates which will only improve on the bottom line. I do not know, but suspect that BP will be purchasing the tar sand Canadian crude at a deep discount over the WTI prices. With all this being said, I plan to more than double my stake in BP.

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