Earlier this year, I opined that BP plc (ADR) (NYSE:BP) could offer some serious value and that buying at $34 was a decent place to get in. BP stock is up about 20% since then, and that was during an era of oil prices that were sub-$50. With oil having broken out decisively over that threshold, BP stock is set for further gains.
There’s a lot to be said for oil and energy companies that have survived ever since oil prices crashed. Get this — not only has BP survived, but it did so despite tens of billions of liabilities payable for the Deepwater Horizon disaster.
BP is more than holding its own, and management indicated that it could operate at breakeven if oil was as low as $42. However, oil is close to $56 now.
OPEC and Russia have agreed to maintain their current production cuts of 1.8 million barrels per day until the end of 2018. This was the first OPEC deal reached in eight years. The goal is to get its reserves back to about its five-year average, but it must thread the needle to a certain extent.
If prices get too high, the shale producers will swoop in. OPEC needs higher prices to support its operations. If it enters the fray in increasing amounts, then oil prices could slip back down again.
Regardless, with oil prices of $48 or so, BP stock generates enough cash flow to cover its dividend on top of its capital expenditure requirements.
Meanwhile, we see the BP stock price up based on some rather impressive earnings in Q3. Revenues rose 24.9% to $60.9 billion. The bottom-line profit increased 9.9% to $1.8 billion, which now places BP well into five straight earnings periods of profit.
However, it is cash flow that matters to E&P companies. BP generated operational cash flow of $6 billion, hitting a high-water mark for the last couple of years while exploding 139% over last year’s mark.
Free cash flow reached an important high also. About $1.9 billion was generated, a number not seen since mid-2015. Considering the low point was negative $2.5 billion, that is one heck of an improvement.
As far as cash, BP stock is still sitting on more than $25 billion, despite all the billions it paid out over the years in settlement funds. From what I can see, the dividend is sustainable here at $2.40 per share.
Meanwhile, BP stock will benefit if management carefully balances its cash usage by repurchasing stock. BP stock is cheap, so that’s a fine use of the cash, and it also reduces dividend payouts.
BP is not just sitting around being careful anymore. It has several new projects rolling out in Oman, Egypt, Trinidad, the North Sea and Australia.
BP has a huge advantage over its shale peers. The latter carry debt that is often quite expensive. BP, however, is burdened by a mere 1% interest rate on most of its $120 billion in debt.
Bottom Line on BP Stock
I am digging BP stock at this level. While Big Oil has a very strong future, its peers have less upside because they didn’t suffer the combination of a deepwater accident and low oil prices. BP stock has further to climb and pays a 6% dividend while you wait.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns shares of BP. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.