BP Stock Is a Good Buy for a Very Particular Investor Mindset

BP stock could be the right fit for the right kind of investor

By Vince Martin, InvestorPlace Contributor

BP Plc Stock Has Become One of Better Picks Energy Patch

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I’m not the biggest fan of BP plc (ADR) (NYSE:BP), for a number of reasons. I don’t particularly like the energy space, as I expect oil and gasoline consumption and prices eventually will come down. There are lots of reasons BP stock isn’t for me.

There’s pressure from the EV revolution being led (possibly) by Tesla Inc (NASDAQ:TSLA) and other automakers on one side and plunging per-barrel costs and steadily increasing production from U.S. shale on the other. And, as I wrote all the way back in February, I still question whether BP stock is the right play for energy bulls.

It’s a similar argument to the one I’ve made about Exxon Mobil Corporation (NYSE:XOM): the internal hedge between upstream and downstream operations keeps the stock from having much in the way of upside.

Were I to make a bullish bet on oil in particular, I’d much rather own a stock like Chesapeake Energy Corporation (NYSE:CHK) or just buy oil ETFs or futures directly. All that said, with the recent modest pullback in the BP stock price, and the stabilization of Brent above $60, I’ll admit there is a bull case for BP.

For income investors who are at least modestly positive on oil long-term, BP definitely is an intriguing choice. And in a market where ‘safety’ increasingly is tough to find, I’ll grant at the least that investors can do worse than BP stock.

BP for Income Investors

The best news coming out of BP’s Q3 earnings beat in late October surrounded the BP dividend. Quarterly earnings aren’t usually a huge deal for energy companies. But as Bret Kenwell detailed on this site, news out of the quarter makes BP’s dividend look much safer than previously feared.

And while high-yield stocks can be dangerous for income investors, particularly those in retirement, BP’s 6% yield is hugely attractive at a time when 10-year Treasuries are yielding less than 2.4%.

With Deepwater Horizon liabilities finally receding and BP even talking about buying back shares, BP’s dividend at the least seems safe for now.

Longer-term, risks persist. BP has said it can now be cash flow breakeven at $49 Brent, down significantly from $60 just a couple of quarters ago. But breakeven doesn’t cover the dividend; a sustained but still-modest dip in Brent prices could again raise concerns about BP’s yield.

With Germany pushing for a Continent-wide ban on gas vehicles by 2030, Brent in theory could even dip below US-based WTI (West Texas Intermediate), something that’s happened only rarely this decade. Still, some risk might be needed at the moment.

I’m not exactly thrilled about traditional dividend stocks like Procter & Gamble Co (NYSE:PG) or The Coca-Cola Co (NYSE:KO), either, for various reasons. For investors who at least have their eyes open as to the risks facing the BP stock price and its yield, BP probably is worth a look at current levels.

BP Stock for Energy Investors

For those bullish on energy, I still question whether BP makes all that much sense. But for investors with a specific outlook, there’s probably a case for BP stock. Essentially, that outlook is a bet on something close to the current environment persisting.

Spreads are wide, which helps BP’s refining business. Oil prices are high enough for the upstream businesses to be profitable but low enough to keep gasoline demand intact. The current environment basically is ‘good enough’ across the board.

So if this is what the “new normal” looks like, BP stock might be rather well positioned. On an earnings basis, it’s cheaper than U.S. stocks like XOM or Chevron Corporation (NYSE:CVX).

The weaker pound has lowered expenses in the UK on a dollar basis. And BP has major new developments in the North Sea and the Middle East that should provide profit growth going forward. To my eye, it’s not the most compelling case in the market.

But it is, at least, one of the better stores in large-cap oil and gas. Combined with a 6% yield, it might be enough for investors willing to take on some risk for some reward. There are other stocks I like better, but there are many more I like worse.

As of this writing, Vince Martin has no positions in any securities mentioned.

Article printed from InvestorPlace Media, https://investorplace.com/2017/12/bp-stock-investor-mindet/.

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