The oil patch is getting its mojo back, as seen with the nice move in BP plc (ADR) (BP), which is up about 5%. The company posted a fairly solid earnings report and should also get a lift from the rebound in crude prices.
Of course, BP stock sports a juicy 7.5% dividend yield. This compares to 3.3% for Exxon Mobil Corporation (XOM), 4.2% for Chevron Corporation (CVX) and 2.1% for ConocoPhillips (COP).
Yet there are certainly material risks. After all, the company has had to dramatically restructure its operations because of the enormous liabilities from the Deepwater Horizon spill in the Gulf of Mexico during 2010.
However, might there still be upside here for BP stock?
BP by the Numbers
Well, let’s take a deeper look at the first quarter: BP reported a replacement cost loss at $485 million, which was down from a gain of $2.1 billion in the same period a year ago (keep in mind that replacement cost is a common way to measure profitability for oil operators). This was higher than the consensus of about a $140 million loss.
Besides, with oil prices averaging about $34 per barrel during the quarter, the performance was impressive.
As should be no surprise, there is still some uncertainty with the liabilities from Deepwater Horizon disaster. In the latest quarter, BP took a $917 million charge for this. In fact, the total costs have come to a staggering $56.4 billion.
Then again, much of the exposure has been settled, which should provide some comfort for investors.
Something else: Over the past five years, BP has had little choice but to engage in aggressive cost cutting, involving sizable layoffs as well as over $40 billion in asset sales. The result is that the company’s core operating structure is much more streamlined, which has allowed BP to weather the sudden drop in crude prices. Its rivals, on the other hand, have had to scramble.
It also helps that BP has a diversified platform. For example, the refining and marketing segments have continued to thrive. In the first quarter, there was a replacement cost profit of $1.8 billion.
And yes, BP stock should get a lift from the long-term opportunities. As noted by InvestorPlace.com’s Charles Sizemore, the company recently struck a strategic deal with China National Petroleum Corporation. The two companies will explore, develop and produce shale gas resources in the Sichuan Basin of southern China.
Given that the country wants to reduce its awful pollution and move away from coal, this deal with BP should get a high priority — and could be a nice source of ongoing profits.
Bottom Line on BP Stock
Don’t expect the cost cutting to end anytime soon. For the current year, BP plans on spending about $17 billion on capital expenditures, which compares to $25 billion during 2013. There are also plans to reduce the workforce by about 7,000.
The idea is to keep lowering the break-even point that’s based on the price of oil. Currently, it’s about $60 but it could drop to $50 to $55 within a year or so.
In other words, if crude oil can continue its recent bull move, then profits will certainly get juiced, especially since the cost structure will likely continue to trend downwards.
Actually, some noted oil analysts think that crude oil could even double by year end. Just look at Mike Rothman, who is the president and founder of Cornerstone Analytics. He has a price target of $85 on crude oil because he believes that demand will be continue to be robust and that output will trail off because of the massive cuts in capital expenditures.
No doubt, predicting oil prices is very dicey, especially lately. But Rothman has a solid track record and has some good reasons for why oil could continue its rise.
And if his scenario pans out, BP stock could be poised for further gains.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
