Oil prices might not even be close to back to the $100 per barrel level, and prices may not reach that mark again for a while — if ever. But investor sentiment about the energy sector is starting to change, meaning that investors shouldn’t just keep an eye on British oil giant BP plc (ADR) (NYSE:BP) — they should even expect outperformance from BP stock.
With BP now focused on managing and rebalancing its operation, cutting costs and strengthening its portfolio, BP stock looks like a relative bargain despite being one of the biggest surprises so far in the energy sector.
That, coupled with a massive 5.52% annual dividend yield paid out by BP stock, means investors looking for a top energy pick for the next 12 to 18 months don’t have to look too far.
The Case for BP Stock
Crude prices ended Friday at $57.15, which puts oil’s rebound at more than 30% from its 2015 lows. Sure, no one really knows where prices will head next, given the global glut of oil that remains.
But we do know that BP, which reports first-quarter earnings results Tuesday, will figure out a way to make money once prices stabilize.
BP stock closed Friday at $43.46, down fractionally, but shares are up some 14% year-to-date, better than the respective gains of 1.4% and 2.9% in the Dow Jones Industrial Average and the S&P 500. By contrast, shares of rivals Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) are down 6% and 2%, respectively.
BP has been able to make the best out of a bad situation. BP’s earnings in its downstream business, for instance, continue to climb, up from $70 million to $1.2 billion in the fourth quarter. Unlike many of its competitors, BP is able to capitalize on a thriving refining business. Not to mention, BP benefited from better-than-expected trading activities.
What’s more, BP stock may have only just begun to climb, given that BP projects higher margins in its upstream business in the quarters ahead, driven by areas such as the North Sea, Azerbaijan and Angola. These are dominant profit-generating regions for BP.
The New Normal in the Energy Sector
For the quarter that ended March 31, analysts expect earnings to be 28 cents per share, down 73% from $1.05 earned last year. For the fiscal year, earnings are projected to be $1.92 per share. While this too would mark a significant decline — from $3.96 per share earned last year — this is the result of the “new normal” caused by plummeting oil prices.
And given that BP stock is still up by double digits despite the projected year-over-year earnings decline suggests the market has embraced the new realities among the energy majors.
BP is resetting its business, given that projected 2016 earnings of $2.92 per share would mean a 52% year-over-year jump from 2015 expectations.
It would seem investors in BP stock believe that’s worth waiting for.
In the long term, BP stock should also benefit from BP slashing capital expenses by 20% as BP rebalances its capital program, including initiatives to cut 2015 costs by $4 billion to $6 billion. Not only will its strategy to exit non-core upstream assets strengthen BP’s portfolio, but it also should reduce the inherent risks caused by prolonged weakness in oil price. Not to mention, it also allows BP to generate strong top-line growth from a smaller base.
All told, there’s never a dull moment in the world of BP, and BP stock is about to get more interesting, too. That management continues to uncover ways to reward shareholders with higher profits and dividends is a testament to their skill.
And that’s one more reason investors should bet on BP stock ahead of Tuesday’s results.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
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