BP plc (ADR) (NYSE:BP) has had a nice rally of late. Buoyed by rising Brent crude prices, the BP stock price has risen 20% just since mid-August, reaching a two-year high in the process.
But in a way, that run actually has confirmed my skepticism toward the stock, which I detailed back in February. Investors bearish on oil obviously would look elsewhere. Those bullish on oil, however, simply had much better plays.
That’s been the case as Brent has cleared the $60 level. Statoil ASA(ADR) (NYSE:STO) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A,RDS.B) have provided similar returns over the past two months and far better performance year-to-date. Ecopetrol SA (ADR) (NYSE:EC) has gained 26% just in the last month, and once-struggling Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) has outperformed BP stock as well.
BP does offer an attractive dividend, which yields 5.9% even after the current gains. But it still has Deepwater Horizon liabilities left, and still has a higher breakeven point, and thus more risk, than most of its large-cap peers.
And there’s still the internal hedge between the company’s upstream exploration efforts and its downstream retail and chemical businesses. It’s a similar profile to Exxon Mobil Corporation (NYSE:XOM), and it creates the same problem for BP stock. Income investors might like BP (though XOM’s 3.7% yield looks much safer). But energy bulls have much better options.
BP Stock Isn’t a Bad Buy…
Without question, there are worse stocks in the market than BP. And BP has had an impressive year so far, including a strong Q3 earnings report. Coming out of the Q1 earnings report just six months ago, BP was guiding for breakeven free cash flow at $60 Brent. That figure already has come down to $49 – while Brent has risen to $63.
The company also announced its intent to start repurchasing shares on the Q3 call. As InvestorPlace contributor Bret Kenwell pointed out, the dividend itself had been in question ahead of the report. BP even moved to an optional ‘scrip’ dividend paid in shares of BP stock to ease some of the cash required for the payout. The move to buy back stock suggests management is much more confident in the dividend’s sustainability.
Meanwhile, Deepwater Horizon liabilities are trending down from a guided $5.5 billion in 2017 to just $2 billion in 2018 and $1 billion a year after that. That frees up more of the free cash flow generated by BP for shareholder returns and for development of new plays, including the major Khazzan gas field in Oman.
And, of course, the recent strength in Brent crude, in particular, bodes well. With the BP stock price trading at 17.5x 2018 EPS estimates, a substantial discount to US-based peers like XOM and Chevron Corporation (NYSE:CVX), there is a bull case to be made for BP stock.
…But Others Are Better
All that said, I’m still not sure BP is a great play on oil prices or necessarily a safe income stock. The gains since August are nice, but investors actually could have purchased Brent though an ETF like United States Brent Oil Fund LP (NYSEARCA:BNO) and done better. BNO is up 25%+ since mid-August.
The Deepwater Horizon liabilities are receding but still total billions going forward. As for the share buyback, the news isn’t quite what headlines suggest. BP’s repurchase program is intended only to offset the dilution from the scrip dividend. Essentially, the company is committing to funding the dividend in full in a roundabout way. The cash that would have gone to the 20% of investors (per the Q3 conference call) who are choosing the scrip dividend instead will go to buy back those issued shares in the open market. BP’s buyback isn’t reducing the float or helping EPS growth.
I still think the bull case for BP simply is too narrow. The dividend is safer than thought, but not necessarily safe, particularly if Brent pulls back. Further gains in Brent prices will help BP stock. But they will boost other stocks more, as seen so far this year. XOM stock offers the same upstream/downstream diversification without the Deepwater Horizon headache and with much less of the in-country risk BP is taking in markets like Egypt, Oman, and Russia.
Again, BP isn’t a bad stock, and the BP stock price is reasonable. But whatever investors are looking for, I still believe they can get more of it elsewhere.
As of this writing, Vince Martin has no positions in any securities mentioned.