Is It Finally Safe to Own BP?

By Ryan Guenette - August 23, 2012 | Tickers: BP, CVX, E, XOM, TOT | 0 Comments

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On April 20^th, 2010 the Gulf of Mexico near the Mississippi River Delta ran black with oil. A wellhead blowout caused an explosion on the Deepwater Horizon, killing 11 workers. Under the contract of BP (NYSE: BP), Transocean ran the rig until 9:45 P.M., when high-pressure methane gas from the well expanded into the drilling riser and onto the drilling rig, where it ignited and exploded, consuming the Deepwater Horizon in flames. An estimated 4.9 million barrels of oil escaped into the waters of the Gulf of Mexico, outpacing the Exxon Valdez oil spill as the largest to ever originate on United States waters. Destroying wildlife and industries alike, the spill spun the Gulf States into devastation. According to BP, $20 billion has been set aside for a recovery fund, 14.81% of BP’s current market capitalization. Since that tragic date, BP has declined 28.56%, during a period in which the S&P 500 has rallied 18.85%. As BP finally refocuses on business, is it finally safe to own BP?

Positive Long-Term Fundamentals

In 2002, BP reported earnings per share of $1.83. In 2012, the average analyst consensus believes British Petroleum will derive $5.57 from its business operations. This represents an increase of 204.37%, an astonishing feat for a company that absorbs shockwaves from the great recession of 2008 and the largest oil spill in decades. Based on these statistics, the company’s compound annual growth rate (CAGR) is 11.77%, nothing to sneeze at. However, it is noteworthy to observe the volatilely in the company’s earnings, causing earnings to decrease nearly 20% from 2011-2012, mostly linked to spill costs. Additionally, British Petroleum currently pays out an annual dividend of $1.92, which at the current price puts the company’s dividend as 4.49%. This is up from 2011’s annual dividend of $1.68, and is further anticipated to expand into the future. By 2014, the street anticipates BP’s dividend to reach $2.35, representing 22.40% growth over two years, a steady rate for any company. From this we can see British Petroleum’s underlying financial persistence, annualized double digit annualized growth rate, and expanding dividend.

The chart below displays BP’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

Recovering and Looking Forward

The total cost of the settlement for the 2010 oil spill disaster is estimated to reach $7.8 billion, according to company projections. While British Petroleum is also losing popularity among its customers, the realized costs of the disaster were only $7.8 billion. Since the spill occurred, BP’s stock has decreased 28.55%, a whopping number. This indicates British Petroleum’s company has lost $38.71 billion in market capitalization since the oil spill. At the very least, BP should regain the $30.91 billion it lost in the chaos after the spill. That represents an increase of 22.80%, returning to the value before the oil spill. Much of the loss in additional capital was due to the uncertainty swirling around how much BP would have to pay for its actions, and now that a number has been set, there is no further confusion, which when the dust settles, will allow investors to feel safe inside BP’s stock.

Additionally, due to the recent slip in share prices, BP’s shares sit at historically low multiples, giving investors a chance buy shares at ratios not seen since for decades. The chart below displays this.

Who’s the Industry Trailblazer?

Compared to some of BP’s most prominent competitors, such as: Chevron Corporation (NYSE: CVX), Total S.A. (NYSE: TOT), Exxon Mobil Corporation (NYSE: XOM), and Eni SpA (NYSE: E), BP compares relatively favorably.

In terms of growth, Chevron tops the industry, while British Petroleum displays a more mature pace of growth. All companies pay out relatively large dividends, with Eni SpA possessing the largest dividend, and Exxon Mobil possessing the fastest growing dividend. In the fundamental ratio comparison, all companies trade below the average, signaling underpriced stocks. When growth is taken into account, Chevron appears to be trading at a bargain, while Exxon Mobil appears a little pricy. In the net profit margin comparison, all companies hover below 10.00%, except for Chevron.

The Foolish Bottom Line

British Petroleum has caused incredible harm to millions of people, and I am not going to defend their inexcusable actions, yet their stock was hammered well past where it should have fallen. The company is massive, and should benefit from the long-term trend of rising energy prices. Their financial strength over the past decade has been incredible, and their double digit annualized growth rate should vastly benefit shareholders. Their dividend is an elite group of 4% yielders, and they will further grow this dividend into the future. Trading at historically low prices, British Petroleum may appear attractive, but I will still favor other energy companies that are more diversified. However that does not put BP’s stock in the pound, I just believe there are better options.         

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