With the oil market debacle persisting, times are hard for oil companies. As a testament to this, BP PLC (BP) announced this morning that it would cut 4,000 jobs over the next year.
A BP representative told The Wall Street Journal that the proposed employee downsizing is in response to falling oil prices. In addition, the downsizing is also part of a restructuring that BP stock is undergoing following the 2010 Deepwater Horizon litigation, which has cost it billions of dollars.
This comes after BP stock cut over 4,000 jobs last year.
In reality, it is difficult to put a buy call on any oil company right now, especially for those looking for short-term gains. Still, a market maxim says buy low and sell high. So with BP stock down by about 46% from its 2014 high and down by about 63.7% from its 10-year high, it’s only fair to check if there’s an opportunity here.
And contrary to what you might expect, there is an opportunity here.
Litigation a Blessing in Disguise for BP
In 2011, BP stock established a three-year, 10-point plan in a bid to return stability to BP stock following the Gulf of Mexico mishap. By the end of 2014, BP stock was able to complete the 10-point plan successfully.
As a whole, the idea behind the 10-point plan was to instill a stricter operational discipline in BP — at a time when other oil companies were prospering. But now that the oil market has all but collapsed, other oil companies are having to go through the tightening phase that BP stock already endured.
Fortunately, for BP stock, this landscape isn’t entirely new to it, and it seems to be benefiting from the operational discipline it got at the time.
I would like to point out one of those ten points and how BP is still benefiting from it.
Respectable Operating Cash Flow Trend
In the plan, BP stock said it wanted to increase operating cash flow by 50% by the end of 2014 — and it did just that. Its operating cash flow at the end of 2010 was $13.6 billion. And by the end of 2014, that figure had risen to $32.8 billion.
You’ll want to bear in mind that BP was able to achieve this even though oil prices had started declining. And looking at the charts, BP stock still did pretty impressively in 2015 on this front when you consider that 2015 brought a fresh unwanted twist in the oil market.
Yes, its operating cash flow dropped in the first quarter of 2015, but it started picking up again in the second quarter.
You’ll appreciate the good job BP management is doing when you consider that competitors like Chevron (CVX) and Exxon Mobil (XOM) have been seeing their cash from operating activities decline since 2011, while the reverse has been the case for BP stock.
And judging by the results for the first nine months of 2015, it is likely that BP stock will see its operating cash flow eclipse that of Chevron for the full-year 2015 — even though they both saw a dip in this metric for the first nine months of 2015. But the point is, BP stock seems to be weathering the current turmoil in the oil market better than its competitors.
This means that BP stock is one of the best-positioned oil companies to be profitable again once the demand and supply dynamics of crude oil balance up. While it remains unseen when that will be, it’s a given that the oil market will recover sooner or later — even if not to pre-2014 levels.
So if you take the long view, like me, and you’re looking for a bargain in the oil sector, BP stock is certainly one to consider.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
