BP's Progress Makes It a Buy

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The super-major BP (NYSE: BP) is picking up steam and marching toward the profitable days of old. These were of course the days before the Deepwater Horizon disaster when production was high, profits soared, and investors were tickled pink. Investors are once again beginning to smile at the returns from BP, which includes major pension funds and other investment vehicles used to help support the lifestyles of retirees.

BP recently sold its stake in the troubled Russian venture TNK-BP (made with Rosneft, Russia's state-controlled oil company) in a deal that will make BP a one-fifth holder of the Kremlin's oil champion that will control nearly 40% of Russian output. Because of clashes with some of the billionaire co-owners, this deal seems to take away the strife while leaving room for BP to profit from Russia's vast reserves.

According to the agreement, Rosneft will pay BP $17.1 billion and 12.8% shares from its treasury, worth about $9.7 billion, for the 50% stake in TNK-BP. BP will then buy further shares in Rosneft from a state holding company to increase its stake to almost 20%. Rosneft will pay the group of billionaires, known as the AAR consortium, $28 billion in cash for their stake. Though somewhat convoluted, the bottom line is that BP opens up a new world of possibilities and potential from Rosneft's huge reserves and production capabilities. I believe BP to be more of a buy now than ever before. The company is finally standing on solid ground, is getting its debts, including penalties and legal liabilities related to the Deepwater disaster paid down, and is in a position now to focus on exploration and production. This is a company with a history of bouncing back and providing investors reasons to stay the course with a company that knows how to win.

Since BP paid about $8 billion for its stake in 2003, the TNK-BP deal enables BP to reap a bonus from the sale of its stake in Russia's third-largest oil producer since it has returned around $19 billion in dividends. The deal fed into the decision for BP to announce an increase in its third-quarter dividend to $.09 a share, an increase of 12.5 percent helping the company to reassert its status in pension fund portfolios. BP's CEO Bob Dudley stated that, "We recognize that we have had some very patient shareholders. It is a combination of divestments, projects coming on stream and some clarity in Russia that gave the board the confidence to reward our shareholders this quarter." Before the Gulf disaster when the dividend was at $.14 a quarter, it contributed about $10 billion a year to pension funds. The $.09 dividend represents an annualized payment of about $6.8 billion.

Competitor ExxonMobil (NYSE: XOM) is also in deals with Rosneft. ExxonMobil signed a deal this past spring to jointly explore for and develop oil and natural gas in Russia and to share technology and expertise. The two formed joint ventures to manage an exploration program in the Kara Sea and Black Sea. The agreement set the terms for investments to be made by the partners in Russian offshore projects. The start-up cost of preliminary exploration is estimated at over US $3.2 billion. Royal Dutch Shell (NYSE: RDS-A) is not yet a significant player in the marketing of Russian oil. The company is getting close with over $4.5 billion spent so far just on permitting for Alaska's Chukchi Sea. Royal Dutch Shell had hoped to complete six wells there by now, but the upcoming winter will be holding it up along with a series of setbacks with spill-response equipment.

While the ramifications of the 2010 disaster have not completely ended, BP is seeing the light at the end of the tunnel. The company has divested $35 billion worth of businesses including $11 billion in disposals since the second quarter, led by its Texas City and Carson refineries in the US, selling the Texas City refinery last month to Marathon Petroleum (NYSE: MPC). Marathon Petroleum only paid $598 million for the refinery itself and other nearby pipelines and fuel terminals, but paid $1.2 billion for the plant's inventory of oil and petroleum products. Marathon Petroleum operates oil refineries and pipelines, and it sells fuel to drivers through its Speedway service stations.

BP sold its Carson refinery to Tesoro (NYSE: TSO) this past August. Tesoro paid $2.5 billion in cash to acquire the 266,000 barrel per day refinery as well as the associated network of pipelines and storage terminals and the ARCO-branded retail marketing network in Southern California, Arizona, and Nevada. The sale also includes BP's interests in associated cogeneration and coke calcining operations. The closing is expected to happen before mid-2013. With these sales along with others, BP is hoping to make its final payment of $860 million into a $20 billion Gulf of Mexico compensation fund. Excluding that $20 billion fund, the company has paid out $15 billion in compensation and clean-up costs so far.

In its third-quarter results, BP stated that it is on track for delivery of strategic 10-point plan to 2014, and that it plans to deliver long-term free cash flow growth, focusing and de-risking the portfolio and increasing investment in upstream. The company also stated that its third quarter underlying replacement cost profit was $5.2 billion, compared to $3.7 billion reported for the previous quarter and $5.5 billion for the third quarter of 2011, which was prior to a number of significant divestments. Production of oil and gas, excluding TNK-BP, was 2.26 million barrels of oil equivalent a day (mmboed), which was similar to the second quarter and three percent lower than a year ago.

The results revealed that production is expected to increase in the fourth quarter as the maintenance season completes and the benefit of new projects continues, but offset partially by the timing of Gulf of Mexico and North Sea divestments expected to be completed in the fourth quarter. BP reported third quarter 2012 earnings of 0.301 per share, exceeding last year's third quarter results by 13.16%, and had third quarter 2012 revenues of $90.59 billion, 2.95% below the prior year's third quarter results.

BP is on its way back to the top and that the company is literally cleaning up its act. It has new policies in place regarding safety measures and response times to disasters, and it is rebuilding its reputation. BP is currently trading around $42.54, between a 52-week range of $36.25 and $48.34. I anticipate BP will maintain a price level between $46 to $48 by early to mid 2013. BP is a buy now.

jordobivona has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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