Shares of BP plc (ADR) (NYSE:BP) have risen as much as 6% from $35.09 to a recent high of $37.19 since I last recommended the stock. My bull thesis is based on multiple factors, including the company’s strong dividend and rising cash flows. Following BP’s solid earnings results, I now expect BP stock to reach $45, owing to the company’s improved capital expenditure plan.
Despite last week’s rebound in oil prices, which broke back above $50 per barrel, investors remain lukewarm as the energy market continues to drag along. But BP is not alone.
The global oil supply glut, combined with an ineffective OPEC has also caused panic in BP peers, such as Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX).
In the case of BP, however, ignoring the potential long-term value doesn’t make sense.
Reasons to Like BP Stock
Aside from the high dividend yield of 6.6%, which more than triples the 2% yield of the S&P 500, BP stock’s low valuation should offset any near-term risk of a continuing rout in oil prices.
What’s more, the company’s solid first-quarter earnings results affirmed that BP can fund both its capital expenditure and its dividend from operating cash flow, which in the first quarter reached $2.1 billion, with $3.8 billion in capex and another $1.3 billion in dividends.
The fact that first-quarter production rose up 3% year over year to 2.388 million barrels of oil equivalent per day was another encouraging sign that the British energy giant had turned the corner. Now BP is benefitting from key project ramp ups.
Elsewhere, BP sold liquids at $49.87 per barrel, topping last year’s mark of $29.61. Natural gas prices sold at $3.50 per thousand cubic feet, compared with just $2.84 a year ago. Notably, BP achieved overall price realization of $37.19 per boe — a strong rise from the year-ago level of $23.81.
These are major fundamental improvements that are yet to be priced into BP stock. Increased liquid and gas prices, as well as higher production, will boost operating profits in the quarters ahead. What’s more, they will help offset weakness in the downstream business. Looking ahead, BP expects second-quarter production to be flat sequentially, but expects higher refining margins.
Accordingly, BP should realize higher cash flows in the second half of the year, as it cuts costs and strengthens its portfolio. The higher cash flow should come from a combination of higher price realization and lower capital expenditures, which makes BP stock a strong bargain at current levels.
Bottom Line for BP Stock
If you’re hoping for BP stock to immediately go on a sharp upward trajectory, you’re going to be let down. But with some patience, BP shares can reach $45 in the next 12 to 18 months.
With a whopping $23 billion in cash and another $5 billion of non-strategic assets it plans to divest at some point this year, BP has a lot of firepower to sustain its operation, raise its dividend and buy back stock while the oil industry stabilizes.
Patient investors with long-term horizons will be rewarded.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
