Two Years After Deepwater Oil Spill-Where Will BP Go?
McLain is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
British Petroleum, better known as BP is one of the largest integrated oil and gas companies serving millions of people in hundreds of different nations daily. With a market cap of $133 billion and revenues exceeding $386 billion, BP is the fourth largest company in the world. It has been over two years since the BP (NYSE: BP) oil disaster devastated the Gulf coast. The leaking oil was finally capped after releasing roughly 5 million barrels of oil, which caused BP to create a fund of $20 billion to pay for damages ($4.7 billion which has been paid so far). One would think that this accident will hamper the company's stock price for years to come, but I believe that BP has paid its price for the spill, and its stock is ready to explode.
BP's stock price has lost 29.76% of its value the past two years, and went from trading at $60 before the spill to roughly $42 dollars today. This loss can not be attributed to a bad global market since the Dow Jones has risen 19% since the spill or can neither be attributed to the energy sector or the price of oil. In comparison two of BP's largest competitors Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) have seen their stock prices rise 35% and 27% respectively over the last two years! During this time frame, BP, Exxon Mobil, and Chevron have all grown their revenues and profits similarly, but BP's stock price has continued to decline while Exxon Mobil and Chevron have continued to rise. An example of this would be BP's gross profit surging from $16.2 billion for 2010 to a record $65.7 billion for the company in 2011, with hardly an increase in stock price!
I believe that because of these diverging stock prices, BP is heavily underrated. BP has a P/E ratio of only 7.88, compared to Chevron at 8.35, and Exxon Mobil at 9.27. The only explanation for this is because of BP's tainted name. Though BP's reputation has suffered because of the accident, it hasn't changed the core value of the company. Investors quickly sold their shares during and after the oil spill, scared of owning a company with low approval. But two years later the stock price has stayed low, though BP has done a lot of public relations work to raise its reputation, and even though the company has grown by leaps and bounds.
Besides the fundamental financial signals such as P/E ratios, etc. BP looks like an attractive buy now because of its plans for the future. BP is investing heavily in over 15 major projects that they plan to be up and running by 2014. These include higher profit margin areas such as Angola, the North Sea, the Gulf of Mexico, and Azerbaijan. BP is playing to its strengths by focusing on exploring (something it is well-known for), and has doubled its exploration budget over the past few years. This year's new upstream projects have already doubled cash margins compared to the company's 2011 average. It is also very important to note that BP is taking half of its operating cash flow and re-investing it back into important projects, showing confidence that it is willing to invest in itself. This will continue to pay off for investors down the road, as new operations help boost the bottom line.
What happened to BP during the oil spill was bad, which makes it easy to ignore the positive outcomes of the situation. The oil disaster was a true test of the company's strength, but BP was still able to overcome and produce strong financial results. BP got its act together after the accident and created a ten point plan, focused on managing risk and producing value for its investors. With all of its new upstream projects that will continue to beef up its bottom line, I see only great results to come from BP in the near future. The oil spill that happened two years ago has not destroyed the company as investors thought it would, but has strengthed it for the future. I think that BP is an excellent buy in today's market, while the price is still very low to historical levels, and before all of BP's investments and developments in emerging markets are realized.
Fool blogger McLain Faett does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. 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.