Is BP Back On Track?
C = Catalyst for the Stock’s Movement
The infamous 2010 oil spill in the Gulf of Mexico was a horrific event, but from an investing perspective, it may have presented an opportunity.
There will likely be a lot of volatility ahead for BP, which relates to litigation. However, keep in mind that BP has set aside $41 billion for damages. What happens if the costs aren’t as high as expected? This would likely lead to a boost in the stock price.
There are other factors working in favor of BP as well. It has high-margin operations in the Gulf of Mexico, it has made new finds in the North Sea, analysts are beginning to jump on board, regulatory constraints have quietly eased, it has eight new rigs in the Gulf of Mexico with the goal of adding two more in the near future, it has sold off $38 billion in non-core assets since 2010, it has an improved its balance sheet, cash flow improvements are likely in the future, and it recently beat expectations. In addition to that, it has a 5 percent yield, which is higher than its peers Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX), which have 2.80 percent and 3.20 percent yields, respectively.
Exxon Mobil and Chevron have outperformed BP by tremendous margins over a three-year time frame, but this mostly had to do with the oil spill and the following litigation. At this point, BP has been beaten down too much and has a lot of ground to make up. However, that doesn’t mean everything is fine and dandy. There are still some external risks. We’ll get to those risks soon.
The chart below compares fundamentals for BP, Exxon Mobil, and Chevron.
|Operating Cash Flow||20.96B||50.48B||36.14B|
Let’s take a look at some more important numbers prior to forming an opinion on this stock.
T = Technicals Have Strengthened
BP has underperformed the market as well as its peers over the past three years, but it has been gaining momentum as of late. The 5 percent yield is also a big bonus.
|1 Month||Year-To-Date||1 Year||3 Year|
At $42.98, BP is trading above its averages.
E = Equity to Debt Ratio Is Normal
The debt-to-equity ratio for BP is close to the industry average of 0.30. BP is focused on debt management. Therefore, it’s not likely to be an issue in the near future.
E = Earnings Are Inconsistent
Earnings might be inconsistent on an annual basis, but other than the disaster year of 2010, BP always delivers big profits. Annual revenue has been on the right track.
|Revenue ($) in billions||367.05||243.96||308.93||386.46||388.28|
|Diluted EPS ($)||6.694||5.252||-1.189||8.057||3.627|
When we look at the last quarter on a year-over-year basis, we see an increase in revenue and earnings. Revenue and earnings have also increased on a sequential basis.
|Quarter||Mar. 31, 2012||Jun. 30, 2012||Sep. 30, 2012||Dec. 31, 2012||Mar. 31, 2013|
|Revenue ($) in billions||97.42||94.89||93.12||103.57||107.21|
|Diluted EPS ($)||1.798||-0.4374||1.703||0.5053||5.257|
Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?
T = Trends Might Support the Industry
On the positive side, companies drilling in the Gulf of Mexico have been performing well as of late. GOM is back! On the negative side, finding low-cost barrels of oil remains a challenge, and future global demand is questionable.
As long as the broader market holds, BP should perform well going forward. If litigation costs exceed expectations, it might lead to a drop in the stock price, but that would only be temporary. Investors would then look at it as something that’s now out of the way, which is always a positive.
Global demand and the Big Bernanke Unwind are much bigger risks. However, in regards to the latter, there is no certainty that he will unwind opposed to increasing stimulus. Many professional investors and traders feel as though Bernanke will orchestrate the unwind so it doesn’t spook markets. That might be possible, but once any sort of unwinding is announced, it’s not likely to lead to any form of celebration. All that said, that time isn’t as near as feared. And even if the market did tank, it could present a cost-averaging-down opportunity for BP or its peers. BP, Exxon Mobil, and Chevron will be around for a very long time, and they’re likely to rebound from any big drops – they always have in the past.
All factors considered, BP is an OUTPERFORM.
Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.
All content posted should never be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions.