BP plc (ADR): 3 Pros and 3 Cons of BP Stock

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BP plc (ADR) (NYSE:BP) is Britain’s largest integrated oil company. BP stock represented one of the bluest chip stocks in the world for many years. Its dividends were reliable and the bedrock of many a retirement plan. However, disaster struck in 2010. The Deepwater Horizon oil spill at BP’s Macondo project was one of the largest accidents in the oil industry’s history. It killed numerous employees and caused grave environmental harm.

BP plc (NYSE:PB)

The company cut its cherished dividend in the wake of the disaster. BP stock dove and the company lost a great deal of respect. It has been a slow road, but BP has regained a lot of investor confidence since then.

Despite another weak earnings report Tuesday, it appears BP is ready to move forward. Is it time to buy BP stock on this dip as the company looks toward new growth opportunities?

BP Stock Pros

Deepwater Horizon Finally Settled: Investors were worried about BP stock because of exposure to the Deepwater Horizon oil spill in 2010. In total, the company spent roughly $62 billion on efforts related to the disaster. It has been a painful legacy for the company.

Besides the damage to the company’s reputation, the financial loss is hard to overstate. In an alternate world where the disaster didn’t occur, BP would have an extra $62 billion, or more than $20 per share in capital.

However, despite its enormous toll, the disaster is finally behind the company. CEO Bob Dudley says that “it’s a huge relief” to move, at last, past the crisis. After six years of being in disaster mitigation mode, BP can focus on building the future rather than surviving the past.

Strong Dividend: BP stock currently offers one of the strongest dividends in the energy sector. With the recent dip in BP stock, the yield is now back at 7%. While energy dividends have been vulnerable in recent quarters, BP is a large firm and more likely to be able to keep paying the dividend than many of its peers.

The argument for BP cutting the dividend is that they are unprofitable at the moment. Thus, paying out a large dividend weakens the firm. However, now that the Deepwater Horizon issue is settled, the company should generate consistent profits going forward.

With oil at $42, they probably do not generate enough profits to cover the entire dividend, but the situation is not nearly as bad as it looks if you just judge based on recent results. Between asset sales and new projects coming online, the dividend should be safe at least for the next year.

Growth Prospects: BP forecasts bringing 800,000 new oil-equivalent barrels of production online by 2020. After years of shrinking itself and hibernating to survive after the Deepwater Horizon, it is starting to make some big new investments. The company has large interests, which it is adding to, in LNG shipping terminals. It remains to be seen how profitable these will be; however, it’s a growing area for the energy industry. And BP is an early arrival to the space.

The company has cut costs to the bone to get through the last couple of years. With one of the industry’s lowest cost structures, it is now positioned well for any turnaround in the energy sector. It has many assets it can bring into play if prices rise, and its low cost base gives it more flexibility in tackling new opportunities.

BP Stock Cons

Oil Price Falling Again: The price of oil appears to be repeating itself. In 2015, the price of oil rallied strongly to start the year, surging from around $40/barrel up to $60. In June, prices topped, and then crude sunk. July 2015 saw a big decline, and prices generally declined into the end of the year, falling back to the $30s.

In 2016, the price of oil rallied from $27 up to $52 in the spring; however, it topped again in June. Like last year, summer brought heavy selling for oil. Crude declined sharply in July, hitting $42.50 on Tuesday. With the U.S. dollar rallying again, there is sharp pressure on the oil market. The talk of more Federal Reserve rate hikes later this fall also weakens the case for oil. BP stock is unlikely to gain much traction if oil can’t find support and move back toward $50/barrel.

More Soft Earnings: BP put up its third consecutive quarter of losses. The company lost more than $2 billion dollars for the quarter. On the plus side, excluding costs from closing out the Deepwater Horizon liability, the company would have made a profit this quarter.

However, refining is now dragging the company down. Profits from that segment hit their lowest point since 2010. Refining insulated many of the big integrated oil and gas firms over the last couple years while smaller exploration firms that didn’t have a refining arm faltered.

Plunging crack spreads (the difference between the price of oil and refined gasoline) have taken a serious toll on refining profits lately. With the glut in gasoline supplies, at least in the U.S., reaching near record levels, refining is unlikely to regain higher levels of profitability within the year. And other BP segments, such as exploration and production, continue to lose money outright.

BP Stock Not Reflecting Oil: Given the various negative factors around BP, you’d expect shares to trade weakly. Instead they have performed relatively well over the last few months. The current $33 BP stock price is in fact well in line with historical levels.

Back in 2012 and 2013, when oil traded between $80 to $100/barrel, BP traded in a range centered right around $34/share. Given that oil has lost half its value since then, it is a bit surprising that BP stock has not given up any value in that same timespan.

Natural gas hasn’t seen many favors either, as that commodity has also experienced significant price declines. BP will perform well if oil rebounds in the near future. Otherwise, the stock seems out of line with the energy industry’s general outlook.

Bottom Line on BP

I like the turnaround story at BP. They successfully navigated an awful crisis and came out of it a stronger company. However, BP stock largely reflects this strength. If you are clamoring to buy a major oil company today, BP is more fairly priced than the U.S. alternatives. But I’d still wait for a dip before taking action personally.

At the time of this writing, Ian Bezek had no position in BP stock. You can reach him on Twitter @irbezek.

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Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2016/08/bp-stock-3-pros-3-cons/.

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