The oil majors, including BP plc (ADR) (NYSE:BP), are under pressure. Oil prices are down almost 20% since climbing to $57.01 in January. BP stock has slipped by about 5% in the same period.
Lingering concerns about global oil supplies caused prices to fall to their 2017 lows earlier this week. And it doesn’t appear as if improvement plans by the Organization of Petroleum Exporting Countries (OPEC), including talk of production cuts, will immediately change the course.
Still, it’s tough to ignore the buying opportunity created by this lingering — albeit frustrating one for energy stock investors — scenario creates for those interested in BP stock.
BP Stock Beating Its Peers
Headwinds in the energy market have pushed down the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) more than 10% this year.
Declines in BP rivals Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) — both off around 9% year to date — suggest the market doesn’t know where to place oil stock valuations. Having already outperformed the XLE, XOM and CVX in stock performance, BP is poised to fundamentally outperform both Exxon and Chevron, too.
BP is now forecasting its production capacity will reach 4 million barrels of oil equivalent per day (BOE/D) by the end of 2020, a million barrels more than last year. At that production pace, BP stock — currently at around $36 per share — can reach $55 to $60 in the next three years.
In the near term, the shares can rise $43 to $45 per share, delivering as much as 25% upside.
Reasons to Like BP Stock
London, U.K.-based BP currently has seven key developments expected to start production this year. Out of those seven, two projects are already online. Another nine are on track for start-up from 2018 onwards, with construction on average, ahead of schedule and 15% under budget, according to the company.
And notably, the company, which sees production climbing back to levels not seen since the 2010 Deepwater Horizon (Macondo) oil spill, is now looking beyond traditional oil and natural gas production.
Management is investing in renewable energy, where the company sees significant future growth drivers, particularly in the shift toward low carbon energy. To that end, BP has secured a partnership with General Electric Company (NYSE:GE) to support GE’s wind energy business. This could be a significant development given that GE is just about to close its acquisition of Baker Hughes Incorporated (NYSE:BHI) now that it has received FTC approval.
And, there’s also BP’s ability to also grow its upstream capacity in a political environment now seen as increasingly oil-friendly.
All told, while aggressive in its plans, BP management, which has had to divest a third of the company’s assets to make up for the losses associated with the 2010 oil spill, continues rebalancing the operation by cutting costs and strengthening its portfolio. Combined with BP dividend yield of 6.7% annually, you’ll be hard-pressed to find a better bargain in energy stocks.
Bottom Line for BP Stock
To be sure, with crude oil having traded above $50 a barrel before early March, $45 is a concern, suggesting that $50 is no longer the strong support level that the market once perceived. Still, with BP’s profit margins — particularly in its upstream business — driven higher by a combination of cost cuts and efficiency improvements, BP stock should rise, too.
Unlike its competitors, BP is able to capitalize on a strong refining business and trading activities. With the company still investing for growth, BP stock should be owned, with eyes on the next price target of $43 to $45 per share.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
