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Why BP plc (ADR) (BP) Stock Is Stronger Than You Think

BP’s profit margins should rise in the quarters ahead


Lingering concerns about global oil supplies caused oil prices to drop to two-week lows last week, causing a selloff in energy-related stocks. Shares of BP plc (ADR) (NYSE:BP) were equally punished, last week, falling almost 4% even though the energy giant reported fourth-quarter results that showed significant year-over-year improvements. But with some patience, BP stock can still energize many portfolios, delivering 15% to 20% returns on its way to $40 to $42 per share.

With declines also seen in rivals Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX), the market doesn’t seem to know where to place oil stock valuations.

This is despite fundamental industry improvement, including production cuts currently being implemented by the Organization of Petroleum Exporting Countries (OPEC) and Russia.

In the case of BP stock, there’s a lot of like, including the fact that the shares, which have fallen almost 8% year-to-date, can deliver 15% to 20% returns in the next 12 to 18 months. BP management continues to focus on managing and rebalancing the operation, cutting costs and strengthening its portfolio. Combined with its annual dividend yield of 7%, you’ll be hard-pressed to find a better bargain in the energy sector.

The Backbone of BP

Aside from its strong fourth-quarter results, which included a 2016 replacement-cost loss of $999 million, which topped the loss of $5.2 billion for the full year of 2015, BP’s Thunder Horse South Expansion Project will be a strong growth catalyst. The company not only finished the project 11 months ahead of schedule, BP also did about $150 million under budget.

Thunder Horse expansion, which is a part of the company’s plan to add 800,000 BOE per day of new production by 2020, is expected to add 50,000 gross barrels of oil equivalent per day of output to the field.

The company plans to add some fourteen new wells to the Clair Ridge development in the North Sea and thirty new wells as part of their Kazzan field development in Oman. And when factoring the 21 new development wells BP plans to add in the Nile Delta, the company is positioning itself to capitalize on the sustained rise in oil prices. All told, while aggressive in its plans, BP is poised to grow its upstream capacity amid a political environment now seen as increasingly oil-friendly.

Why is that important? During the fourth quarter, the company posted an underlying profit from its upstream production segment — the first time it has done so in several quarters. The company, which saw a $400 million gain on the upstream side, benefited from a combination of higher price realizations and the end of some turnaround work in the third quarter. And given that oil prices have risen by around $10 per barrel since the OPEC deal was announced, BP’s profits in the quarters ahead should rise too.

Bottom Line on BP Stock

BP’s profit margins, particularly in its upstream business, should rise in the quarters ahead, driven by a combination of cost cuts and higher oil prices. Plus, unlike its competitors, the company is able to capitalize on a strong refining business and trading activities. And with the company still investing for future growth with projects such as Thunder Horse, BP stock, which deserves a higher valuation, should rise $40 to 442 per share.

As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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