BP plc (ADR) (NYSE:BP) has been showing encouraging progress lately. Since August, shares have jumped from $34 to $40.
Granted, the long-term track record is still fairly dismal. For the past five years, BP stock has returned -2%.
But I think things are finally improving in a sustainable way. Of course, one key is that the Brent oil price has been in rally mode, hitting $64 per barrel. Note that there have been increases for the past five consecutive weeks.
Part of this has been due to instability in the Middle East. Saudi Arabia has seen a major shake-up with its leadership ranks, with more than 200 major figures being detained.
Yet there are other factors at work to explain the move in the Brent oil price. Keep in mind that OPEC (Organization of the Petroleum Exporting Countries) has been able to hold its production levels — and it looks like this will continue for some time.
Oh, and something else: The world economy is in a growth phase. In other words, this has helped to bolster demand for crude oil.
BP Stock Price and Growth
As for BP stock, the company has the benefit of having focused on significant cost-cutting. There has also been an unloading of various assets, which has streamlined operations.
Because of these efforts, BP has been able to lower its break-even price for the Brent oil price, which is currently at about $49 per barrel. Essentially, the company is poised for significant earnings leverage. And yes, there are already some signs of this, as indicated by the latest earnings report. For the third quarter, revenues shot up by 25% to $61 billion and earnings increased by 10% to $1.77 billion. There has also been strong cash flows, which came to $6 billion in the quarter, up 140% on a year-over-year basis.
But the BP story has been more than just about the rise of the price of Brent and cost-cutting. Over the years, the company has made investments in its production. For example, as of this year, six of its seven major projects have come online. They include operations across the globe, in places like Egypt, Australia, Trinidad and the UK North Sea. Note that all the projects have been ahead of schedule and below budget.
As for the downstream business, there has been a strong performance as well. During the latest quarter, the earnings hit the highest levels in five years.
Bottom Line on BP Stock Price
BP stock is not without its risks. Let’s face it: The price of oil can be volatile. What’s more, BP still has ongoing liabilities for the Deepwater Horizon blowout. Even though they are much lower, the payments are still a drag.
But then again, such issues are really baked into the valuation of the BP stock price. Consider that the forward price-to-earnings ratio is 17X. This compares to Exxon Mobil Corporation’s (NYSE:XOM) multiple of 20X and Chevron Corporation’s (NYSE:CVX) of 23X. BP stock also carries a hefty dividend, which is currently at 6%. This is certainly a big factor in today’s low-rate environment.
The company also recently announced that it plans to resume share buybacks, although the amount was not disclosed. True, a key reason is to help deal with the dilution since some of the prior dividends were issued as shares. But the buybacks are still an encouraging sign. Hey, BP would not pursue this unless there was confidence with producing strong cash flows, right? Certainly. And this is definitely backed up with key factors like the company’s disciplined cost-cutting and investments in new projects.
Such moves should allow for durable growth, even if there is a trailing off of oil prices.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
