BP plc (ADR) Stock Still Has Long-Term Upside

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BP - BP plc (ADR) Stock Still Has Long-Term Upside

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Now that BP plc (ADR) (NYSE:BP) is on the other side of the Deepwater Horizon incident, and oil prices are recovering, BP stock has been doing quite well — up 50% since I first wrote about it a year ago. I believe that trend will continue as the company reported Q4 earnings this morning.

Oil prices are well in the $60s now, which helped BP get a nice revenue bump in Q4. I’m glad to see, however, that the company isn’t going crazy with spending as a result.

BP had to cut costs pretty dramatically to stay afloat after the Gulf explosion and oil price crash, but likely future CEO Benard Looney said the company will stay disciplined with expenses, spending $15-17 billion until at least 2021.

BP will otherwise be driven by more and more new projects but will make a profit as long as oil prices stay above $40 per barrel. This will probably include fields in Mauritania, Angola and India. Obviously, it will also help that the oil company will keep drilling new wells where offshore infrastructure is already in existence to keep costs down.

This should result in an increase of around 800,000 barrels per day by 2020. However, those wells will be mostly gas. BP thinks gas will overtake oil as the world’s primary energy source in about 20-25 years.

Meanwhile, BP wants to get to 200,000 barrels per day by 2020 in its North Sea productions of oil and gas. Oil was found at the Capercaillie well in the central North Sea and Achmelvich west of the Shetland Islands. The great news for BP is that it owns 100% of Capercaillie and 53% of Achmelvich.

On a valuation standpoint, BP has a PE ratio of 16.5, which is lower than its peer average of 17.2. However, that is far below peers like Exxon Mobil Corporation (NYSE:XOM) at 20, Chevron Corporation (NYSE:CVX) at 21.8 and Suncor Energy Inc. (USA) (NYSE:SU) at 26.

Obviously, this is a result of the Deepwater Horizon bill and that the company has a good deal of debt. It has a debt-to-capital ratio of 40%, which is almost twice that of XOM and CVX.

Oil prices look like they will hold. Russia and OPEC are holding firm on production cuts of 1.7 million barrels per day until the end of this year at least. Moreover, the idea that OPEC even got to agree to cuts and stick to them is incredible. I guess lower prices were hurting everyone involved.

Now, the cuts can stay in place, but there’s a balancing act. Remember that shale producers are profitable only at higher oil price levels, so if the oil prices get high enough, shale production increases, more supply hits the market, and the prices will decline.

Bottom Line on BP Stock

Meanwhile, BP stock sits on about $25 billion in cash alone. Even with $65 billion in debt, cash flow should remain positive.

I think BP has more upside here for the long term.

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 does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


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