Since the company has started raising dividends after the cut however, I am willing to give it another try. I think that the Gulf of Mexico spill is a major reason why the stock is still so cheap at 9 times forward 2013 earnings and 7.90 times forward 2014 earnings.
However, I think that the fear of bankruptcy for BP is larger than the total cash outlays it would end up expending over time for the oil spill. Therefore, I sense an opportunity to purchase an asset at reasonable valuations that no one likes. The stock also yields 5.10% with a $2.16 in annual dividend. The total amount dividends paid annually was $3.36 per share prior to the oil Spill in the Gulf of Mexico. I believe that this could easily be achieved by the end of this decade, especially if oil prices keep steady.
British Petroleum owns 19.75% of Russian Company Rosneft, which is the largest energy company in the world by reserves, and has a market capitalization of over 80 billion. BP also received a sizable cash consideration in the process, and will be using $8 billion from that to repurchase shares over the next 12 – 18 months. This would offset the reduction in earnings following the sale of its stake of BP –TNT to Rosneft for the cash and stock consideration.
In addition, BP has managed to replenish its reserves continuously over the past two decades. This is an important metric for oil companies, because it shows that they can replace the oil and gas extracted from developed fields through exploring for or acquiring fields that hold an equivalent amount or more of these precious carbons it sells worldwide.
Just like all other integrated energy companies, BP could suffer if oil and gas prices fall and stay low. However, I think that in the long-term, energy demand is only going higher from here. For example oil has so many uses outside of energy, that even if the whole world was running on solar and wind, there would still be a massive need for oil and gas. Even if the whole world used renewable energy to power the economy, realistically this is at least a couple decades away from it becoming mainstream. In the meantime, you can use the sizable dividend from BP as a sort of “rebate” to lower your cost basis in the stock.
Overall, I don’t think I can go too wrong on a company like BP, which is cheap but has room to grow over time, offers a good dividend and buys back its cheap stock.
I would hate to turn this site into a stock picking service, but if there is interest, I would keep posting recent investments. As was the cash with my Roth IRA investments, I am going to post those in a couple weeks. I do post the tickers on Twitter, the day I make the transactions in that portfolio.
Please remember that I am making investments in my own accounts with my own money, based on information, estimates and biases (or experience) I have. These are not investment recommendations for you, but merely examples of the end result behind my investment philosophy and strategy in action. Do your own research before putting your money to work.
Full Disclosure: Long O, BP, RDS.B