The horrific blowout of the Deepwater Horizon oil rig in the Gulf of Mexico in 2010 continues to weigh on BP plc (ADR) (NYSE:BP). During the latest quarter, the company had to make a damages-related payment of more than $4 billion. BP stock is down 6.5% this year.
While other mega oil operators like Chevron Corporation (NYSE:CVX), ConocoPhillips (NYSE:COP) and Exxon Mobil Corporation (NYSE:XOM) have also seen declines, those are mostly attributed to the decline in oil prices. For BP, its restructuring complicates the story.
BP has certainly made tremendous progress in the overhaul of its operations. If anything, it is remarkable that the company has survived.
OK then, so what about the future? Is now the time to be considering an investment in BP stock? Could there be a value play?
Well, I think so — and here are three reasons to consider:
Reason #1 for BP Stock: Oil Prices
Predicting oil prices can be dicey. But according to a Wall Street Journal survey of analysts, crude is expected to average about $53 a barrel this year. True, this is a far cry from the levels reached a few years ago. But it is encouraging that it appears that there will be stability in pricing.
And besides, BP has worked hard to reduce its break-even point for production — which is expected to range from $35 to $45 next year. In other words, the company should be able to crank out sustainable positive cash flows.
Now some of the big issues for crude prices have been the overproduction from OPEC nations and the continued supply from shale sources. But such things are just one part of the equation. It is important to note that economic growth is a critical factor as well. And the good news is that the world economy has been growing, which should drive healthy demand for oil; growth is expected to hit 3.5% this year and 3.6% in 2018, compared to 3.2% in 2016, according to the IMF.
Reason #2 for BP Stock: The Dividend
The juicy BP dividend is often the biggest attraction for investors. Consider that the current yield is nearly 7%.
Granted, there is concern that the company may ultimately be unable to keep up the payments. But then again, BP has a much leaner organization and has also been investing in new technologies to improve overall performance.
As a result, the company continues to pump out a string of cash flows. For the latest quarter, they came to $6.9 billion. And if the growth strategy gets traction, those are only likely to increase.
Reason #3 for BP Stock: Growth
After years of cost cutting, divestitures and restructuring, BP seems to be turning the corner — and looks poised to grow again. For 2017, three of seven major projects have come online. And more importantly, the results have exceeded expectations. For example, the West Nile Delta project was completed eight months ahead of schedule and the production is 20% above projections.
Taken together, the projects are expected to lead to an increase in daily production of 800,000 barrels by 2020. Oh, and it looks like the costs will be 15% under budget.
Interestingly enough, a key to the growth strategy is to return to the Gulf of Mexico. The investments are expected to be over $17 billion through 2021.
While this strategy is certainly risky, BP still has the right assets for deepwater drilling and has also bolstered its safety policies.
In the seven-plus years since the Deepwater Horizon disaster, BP stock has lost 42% of its value, while the S&P 500 Index has more than doubled.
According to InvestorPlace.com’s Aaron Levitt: “The bulk of that spending will be placed in four fields — Thunder Horse, Atlantis, Na Kika and Mad Dog — in the Gulf’s deepwater region. And, thanks to technology, BP now estimates that these four fields hold a combined 1 billion barrels of oil. That’s worth about $40 billion at today’s prices.”
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.