One Good Quarter Is Not Enough for an Investment in BP plc (ADR) Stock

BP stock had a good quarter but remains a speculative stock for an oil major

By Dana Blankenhorn, InvestorPlace Contributor

BP plc (ADR) (NYSE:BP), which suffered the worst blowout in history with the 2010 Deepwater Horizon disaster, has finally had the good kind of blowout. That is the kind where you blow past earnings estimates and make serious money. BP stock earned $1.87 billion, or 9 cents per share, on revenue of $60.8 billion, beating expectations by over $300 million. The company finally delivered the kind of results that speculators have been seeking ever since oil prices peaked in 2014, although the BP stock price remains well below the $60 per share achieved before the disaster.

One Good Quarter Is Not Enough for an Investment in BP Stock
Source: Shutterstock

All this has investors, and InvestorPlace writers, wondering if it’s finally safe to go back into the waters and buy the stock. There is some evidence it is, thanks to a stock buyback, rising oil prices and a dividend now yielding nearly 6%.

But watch out for the caution flags.

Better Ways to Play BP Stock

While it does appear BP stock has finally put its past behind it, and well-run gas stations with the BP logo are no longer being shunned by drivers, the big quarter still didn’t earn back the company’s 60-cent-per-share dividend.

Another reason for caution is that, increasingly, BP stock is less of an oil stock than a natural gas stock. While crude prices have been rising recently, natural gas prices remain depressed, trading below $3 per Mcf.

Operating cash flow is still just bottoming out and remains below its 2015 levels. That puts the dividend, which has been stubbornly kept at 60 cents per share throughout the oil bust, under question. The debt load, about $60 billion on assets of $271 billion, remains higher than those of its peers.

With almost 20 billion shares outstanding, BP needs $48 billion in positive cash flow every year to sustain it, or else it’s eating its seed corn. Even our most bullish writers, like Bret Kenwell, question the dividend’s affordability.

To Chris Tyler, this means the best way to play BP stock is with options, suggesting a bearish put spread can make you money. It’s a trade rather than an investment.

An Appetite for Risk at BP

In its efforts to turn around the company, BP managers have also been taking on increased international risk. The company was back at work in Iraqi Kurdistan hours after the government took back control. It has been selling assets in the established North Sea oil fields while struggling to maintain production on Alaska’s North Slope.  The company is still not earning back its cost of capital. BP also retains a stake in Rosneft, the Russian oil company, and CEO Bob Dudley is on its board.

All that means BP is highly leveraged to good times and has substantial risks in bad times.

The Bottom Line for BP Stock

BP, in short, is a company that is trying hard to make up for lost time, and lost profits, and taking on much more risk — political, environmental and financial — than integrated oil rivals like Exxon Mobil Corporation (NYSE:XOM) or Chevron Corporation (NYSE:CVX), which are increasingly focused on domestic production and refining operations.

Still, your investment could work out because BP is more leveraged to good oil patch news than its rivals.

BP stock becomes a good investment if oil prices remain consistently high, if natural gas prices rise, if operating results continue to improve and if there are no natural or political disasters. All that is possible, but to me it sounds like pulling an inside straight, which is why BP’s market cap of $133 billion remains well below its 2016 revenues of $180 billion.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.

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