In terms of energy stocks, two names come to mind when thinking of stereotypical whipping boys. One would be Chesapeake Energy (NYSE:CHK). The other would be integrated giant BP plc (NYSE:BP). Both have had their shares of up and downs. And both have spent the last few years scraping by while being vilified by various pundits. But while CHK has started to get its act together, BP has already broken free of its former shackles.
The integrated energy stock is making acquisitions, seeing returning cash flows and, perhaps more importantly, restarting its stagnating dividend payout.
For investors, BP and its return to glory represent a great play in the energy patch. The best part is that the firm is just starting to see the fruits of its labor. There’s plenty of runway left for BP.
A Great Quarter at BP
It’s been a long time since I — or, really, most investors — have been excited about BP. After all, BP has spent the better half of the decade cleaning up and paying for the effects of the Deepwater Horizon spill. If you remember, that was the worst oil spill in history and has cost the firm billions of dollars in legal fees, remediation costs and fines. And since the spill — which happened back in 2010 — BP shares have kind of been in a funk.
Much of the firm’s cash flows went towards paying for the disaster and, as a result, its dividend was left out to pasture, CAPEX and exploration budgets were slashed and buybacks were suspended. Even worse was that oil prices began to crater about halfway through BP’s journey through paying for the disaster.
But all of the heartaches seem to be going away. BP is back in a major way.
Just take a look at its latest quarter. Thanks to the spill, BP was forced to become “lean and mean.” It had to cut costs, reduce CAPEX and only focus on the most profitable drilling locations/fields. It simply didn’t have the wiggle room to take big bets that could take years, or might never, pay off. Because of this cost-cutting, BP has benefited immensely now that oil prices have been rising. It’s basically been able to squeeze more out of each barrel.
For the quarter, BP realized profits of $2.87 billion. This compares to the measly $156 million it managed to make in the same period last year. Revenues also surged. More importantly, it builds on the previous two-quarters great earnings.
The Reason to Be Excited at BP
Those consecutive great quarters at the energy firm have also done another amazing thing. Operational cash flows are very much in the black. Cash flow positive is now the name of the game for many stocks. For BP, this means having enough money to fund future drilling activities. Money in equals money out. And BP has it.
Over the last 3-months, BP has managed to produce more than $6.31 billion in operating cash flows. This builds upon the nearly $10 billion in operating cash flows that BP recorded over the previous two quarters. The beauty is that this cash flow generation at BP is now more than enough to fully cover current capital expenditure programs with plenty of extra.
And the company is finally sharing that extra with investors.
BP managed to increase its dividend for the first time since 2014 — by 2.5% — on the back of these higher cash flows. Additionally, the energy producer also increased the size of its buyback program and purchased another $200 million shares on the open market. This is truly wonderful news, as it was only at the end of 2017 that BP ended its script dividend program — allowing shareholders to receive dividend payments in additional shares rather than cash. That was basically done because BP didn’t really have the funds on hand to pay out. Now, BP not only has the cash on hand, but enough to actually give investors more.
In fact, BP is producing so much cash, it’s doing something else it hasn’t done in years — make a major acquisition. In this case, it comes from paying $10.5 billion for BHP Billiton’s (NYSE:BHP) shale assets in the U.S. Thanks to the oil spill and its costs, BP was late to the shale party and was lacking exposure. But with its cash flows now rocking, BP has been able to snag some quality and substantial assets that instantly make it a prime shale player. Those assets should help it advance its low-cost mantra and boost oil production further.
Buying BP Stock
It’s true: BP has finally turned the corner. Years of suffering at the hands of lower oil prices and high costs related to the spill are finally over. Just take a look at its cash flows and what the company has been able to do with them. We’re finally getting buybacks, dividend increases and even spending money to grow. And, yet, it seems that investors are treating BP like the pariah it once was.
Shares can be had for a measly forward price-earnings ratio of just 12.
That’s dirt cheap for any stock, let alone one that is finally seeing real cash flow and earnings growth. I suspect that BP shares won’t be that cheap for long — especially if oil prices continues to be high and its earnings continue to grow.
In the end, BP is finally making the right moves to warrant a position.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.