Time To Buy BP
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Why will I buy BP now? Its being undervalued by most analysts. Despite being able to show a clearer view of its future and a larger dividend (BP recently raised its dividend by 12.5%), BP is down by 1.68% year to date while the S&P 500 is up by 20%. Let's take a deeper look at BP's business case and review its valuation against relevant oil majors.
I know BP's life has been complex. And I am aware of the negatives:
(1) Three years after Macondo, BP remains in recovery mode and since BP has been underinvesting, it needs to catch up. The increase in BP's capex should be the fastest of the European majors, from $23 billion in 2012 to $26 billion by 2015.
(2) The underlying recovery for next year will be obscured by asset sales: production is forecasted to decline by 6% because of the Rosneft deal and asset disposals. Remember that BP has sold $37 billion of assets out of a $38 billion target, one year earlier than expectations. As a result, BP estimates that it gave up $5 billion of earnings per year.
Beyond all the negatives above, I see many positives:
(1) The return of high margin production and better margins on new barrels will be enough to offset the near term drop in production.
(2) I believe BP has the portfolio to grow production at a 2% year over year rate from 2013 to 2020.
(3) Excluding Rosneft and asset disposals, underlying production in 2013 would be up. Remember in the long term, the market is a weighting machine. Yes, peers will probably grow production by 3% in 2014 while BP will trail that number by nearly 2%, but I guess that is already priced in. Actually, let's take a look at valuation.
BP trades at 2013 x7.3 P/E and x4.6 EV/EBITDAX. Total (NYSE: TOT), one of my favorite oil stocks, is not expensive either -- it trades at 2013 x7.5 P/E and x5.8 EV/EBITDAX while paying a 5.7% dividend yield at current price of $51.6. That said, it doesn't have BP's upside.
The case is even more clear when we take Chevron (NYSE: CVX), which trades at 2013 x8.2 P/E and x5 EV/EBITDAX while paying a 3.3% dividend yield, or Exxon (NYSE: XOM), which trades at 2013 x10.5 P/E and x7.3 EV/EBITDAX while paying a 2.6% dividend yield.
Overall, BP is trading at a 27% discount to NAV versus a 19% discount for its peers and on P/E, BP trades at a 10% discount to the peer group. True, I am not a big fan of P/E multiples and cash flows usually tell you much more. Nevertheless, cash flows in BP's case will be compromised by capex needs. You should focus on the story. BP is in recovery mode and will recover; I do not consider that such recovery is priced in the stock.
Remember happiness equals reality minus expectations. My argument is that all the bad news is priced in while most of the good news is not. If expectations are really low then a mediocre reality can make you very happy. In this case it would make the stock price go up. I am going to go long on BP. Meanwhile I can cash my 2013 5.2% dividend yield. You could do the same.
martinzaldua has no positions (yet) in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron and Total SA. (ADR). 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!