BP plc (ADR) (BP) was raised to buy from neutral at Citigroup Thursday, and there is indeed an argument to be made that BP stock — with its massive dividend — can stand out in the energy sector.
The argument of course centers on the continued recovery in prices for crude oil, but BP stock has other things going for it as well.
In the most recent quarter, the oil major made further progress in rebalancing its cash flow. The company posted a loss of $2.12 billion in levered free cash flow during the period, which was narrower than a year-ago loss of $2.64 billion, according to S&P Capital IQ.
A multi-year, cost-cutting plan also continues to bear fruit. More than $40 billion on layoffs and asset sales over the last half-decade have made for a much leaner and profitable operation.
As a result, operating margin improved dramatically on a sequential basis. Earnings before interest, taxes and amortization expanded to 7.9% from 3.9% in the previous quarter.
BP’s Big Yield Saves the Day
Farther out, the company looks poised for better times with a wave of upstream projects and deals with players such as the China National Petroleum Corporation.
And then, of course, there is the dividend with its yield of 7.56%. Energy sector names with big payouts can be a dicey proposition in today’s oil-price environment.
However, a more dovish Federal Reserve should help keep borrowing costs low and a cut would undo much of the progress BP made in market sentiment.
It’s also the one thing that gives BP stock a positive total return for the year-to-date. Higher oil prices and further cost cuts will probably keep it safe.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
