Is BP Undervalued?

With shares of BP plc (NYSE:BP) trading at around $41.22, is BP an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

BP still can’t shake the impact of the oil spill in the Gulf of Mexico three years ago. Truth be told, BP deserves to pay that price. We can talk about investments all we want, but are profits really more important than human lives and nearly obliterating the local environment? BP did a lot of damage, and it’s attempting to make up for the mishap, but it will take many more years to repair its reputation. On the monetary side, BP is also far from out of the woods. BP has attempted to blame others, but it’s not going to work. At the moment, it looks as though BP will be on the hook for between $8.5 billion and $18 billion. Even the low end of that range would be a significant hit. The worst part is that some fines will be paid over the course of several years. Therefore, this cloud will linger over BP’s head for a while.

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BP has made some moves to free up cash. It has sold its interest in the TNK-BP joint venture to Rosneft for a 20 percent stake in Rosneft as well as approximately $12.5 billion in cash. It has also sold its Texas refinery to Marathon Petroleum Corporation (MPC) for approximately $600 million.

Those with a moral compass should not consider BP as an investment. Those who are only looking at this from an investing standpoint might be wondering if this is a buying opportunity. It hasn’t proven to be yet, but this will likely be the case over the long haul. That said, it might not be the best option in the industry.

The chart below compares basic fundamentals for BP, Chevron Corporation (NYSE:CVX), and Exxon Mobil Corporation (NYSE:XOM). These three companies differ in size. BP has a market cap of $131.35 billion, Chevron has a market cap of $227.97 billion, and Exxon Mobil has a market cap of $396.30 billon.

BP

CVX

XOM

Trailing   P/E

11.37

8.81

9.12

Forward   P/E

8.07

9.47

10.48

Profit   Margin

3.08%

11.76%

10.48%

ROE

10.18%

20.26%

28.69%

Operating   Cash Flow

$20.40 Billion

$38.81 Billion

$56.17 Billion

Dividend   Yield

5.20%

3.10%

2.60%

Short   Position

N/A

N/A

N/A

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal      

The debt-to-equity ratio for BP, but it’s not as strong as the debt-to-equity ratios for Chevron and Exxon Mobil.

Debt-To-Equity

Cash

Long-Term Debt

BP

0.41

$19.87 Billion

$48.80 Billion

CVX

0.09

$21.91 Billion

$12.19 Billion

XOM

0.07

$9.58 Billion

$11.58 Billion

 

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T = Technicals on the Stock Chart Are Poor  

While most companies throughout the industry showed impressive gains over the past three years, BP has dropped 22.98 percent over that time frame. Excluding the past month, BP has underperformed Chevron and Exxon Mobil. Some might argue that BP offers the highest yield at 5.20 percent, but at what cost? Collecting a 3.10 percent yield, or a 2.60 percent yield, with stock appreciation is a much better option.

1 Month

Year-To-Date

1 Year

3 Year

BP

2.08%

0.26%

-0.21%

-22.98%

CVX

-0.04%

9.79%

16.27%

67.50%

XOM

-0.40%

3.04%

7.22%

40.76%

 

At $41.22, BP is trading below all its simple moving averages.

50-Day   SMA

41.93

100-Day   SMA

42.06

200-Day   SMA

41.84

 

E = Earnings Have Been Inconsistent                    

Inconsistent earnings throughout the years should be expected in this situation. Revenue might provide a better picture. Revenue has consistently improved over the past several years, but the rate of growth has slowed.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

367.05

246.14

308.93

386.46

388.28

Diluted   EPS ($)

N/A

5.25

-1.19

8.06

3.63

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and a decline in earnings. No surprise there.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

96.34

96.70

94.89

93.12

103.57

Diluted   EPS ($)

2.40

1.84

-0.44

1.70

0.52

 

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 Support the Industry

Alternative energy has drummed up a lot of excitement, and it might be the way of the distant future. However, for now, as well as the near future, oil remains the energy king.

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Conclusion

BP has a lot of headwinds at the moment. Unlike most companies dealing with many headwinds, BP should eventually come out of it without much of a problem. However, there will be several bumps in the road along the way. The 5.20 percent yield makes these bumps absorbable, which makes BP an OUTPERFORM. That said, Chevron and Exxon Mobil are better options.

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