BP plc (ADR) (NYSE:BP) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A, NYSE:RDS.B) are two very similar companies. However, there is nothing similar about the performance of Shell and BP stock. Both have headquarters in the U.K. and both are about as diversified as a large oil and gas company can be. Yet, BP stock has seen 3x the selling pressure of RDS.A. And that’s one big reasonwhy BP is so attractive.
Many automatically assume that since BP’s operations are based in the U.K. that it is doomed to suffer great consequences following the Brexit. Besides the fact that most of BP’s business is created in other countries, and different currency, the assumption itself is just false.
The reason for these false assumptions lies in how BP, and Shell, bill their costs and are paid in revenue. The research firm Tudor Pickering Holt explained that BP’s costs are billed in the pound, which has tumbled, yet its revenue is mostly paid in dollars. As a result, the currency swings actually benefit BP, and make BP stock even more appealing.
What Brexit Means for BP Stock
With that said, there are clear economic uncertainties caused by the Brexit. We don’t know how it will affect trade nor do we know how the decision may affect other EU members. Further, as executive Scott Malat at XPO Logistics Inc (NYSE:XPO) explains, the uncertainty from the Brexit might have an effect on GDP as businesses become more stagnant while prolonging any large, costly deals.
However, oil companies like BP are not as exposed to risks like this. BP’s risk lies more so in oil prices and currency exchange than trade deals and a potential breakup of the EU.
BP has been very aggressive in positioning itself for this new oil price environment. The fact is that oil prices are half of what they were just 16 months ago, and that means large oil companies must make changes in order to create profits.
BP is planning to spend $17 billion in capital expenditures this year. That’s down from $27 billion a couple years ago. BP’s CEO Bob Dudley recently said that BP could keep CAPEX where it is for three years without affecting growth.
Thanks to these spending cuts, BP is very near full dividend coverage, so long as oil prices stay around $55/bbl. The fact that CAPEX can stay at these levels for several years without affecting growth also means that BP’s dividend is safe, while a return to profitability is very possible in this current oil price environment, regardless of the Brexit.
That said, BP already has the cost-saving measures in place, and is well positioned to operate in an environment like this. If oil prices can stay put or continue to trend higher, BP stock is poised to soar higher. Ultimately, what happens with oil has bigger implications on BP than the Brexit.
Dudley recently said that oil prices should stay at $50 and remain there through the end of 2016. He added that BP is not expecting $100 oil any time soon, but $50 to $60 is very possible for 2017.
He said, “Global supply and demand recently have moved toward a better balance, and we expect this trend to continue into the second half of 2016 and probably reaching a balance by the end of the year on a daily basis.”
For a stock that has been completely crushed during the oil route, this return to oil price stability, currency strength from a decline in the pound and cost cuts make BP a much stronger company than it was even before oil prices started to crash.
And with a dividend yield of 7%, BP stock is the perfect investment to exploit from all the Brexit fear.
Yes, many stocks have fallen hard in response to the Brexit, but none have done so more unjustly or are better priced for long-term gains than BP stock.
As of this writing, Brian Nichols was long BP stock.
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