Turn Around in Oil

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

Oil prices are recovering due to global oil supply fears. The oil supply from Iran has been boycotted, and nothing concrete has been done yet to catch up with the shortfall in supplies. The recent rise of Turkey-Syria tension is also adding to the fears. Natural gas seems to be following a similar uptrend, as its being considered as an eco-friendly and cheap alternative for coal. Additionally, the 45% drop in the number of offshore rigs, compared to last year has pushed the prices of gas, nearly 70% since the lows it created this year. These happenings make the oil and gas companies, the biggest beneficiaries. We are bullish on British Petroleum (NYSE: BP), and here are a few more reasons why you should be too.

British Petroleum is an integrated oil and gas company, which is headquartered in London.  The company with a market capitalization in excess of $184 billion is the fourth largest oil company in the world in terms of revenues. BP has operations in more than 80 countries, and its daily produce exceeds 3.4 million barrels of oil equivalent.

The management is now focusing on producing high margin oil, and for that it has been consistently selling its non-core assets. Management expects to raise $38 billion by its asset sale program by 2013, which could be used for strategic expansions to produce high margin oil, and to reduce the company’s debt.

Some more reasons to be bullish on British Petroleum:

  • By the end of 2012, the company expects to drill 12 new oil wells. According to the management, the profit margin per barrel of oil produced, from these wells will be nearly double the current margins.  
  • Additionally, the company recently procured 43 new drilling leases in the Gulf of Mexico.  
  • Management also said that it expects to complete the exploration wells in Namibia, Angola and North Sea.
  • Earlier this year, it was announced that BP will be supplying shipping fuel to 8 more Chinese ports.
  • BP will also be investing $11 billion on the exploration and development of natural gas reserves of Egypt’s Mediterranean Basin. The development is expected to complete over the next 5 years, and the reserves have a capacity to produce 40% of Egypt’s total gas output.

With rising oil and natural prices and the expansive activities of BP, the cash flows of the company are expected to only increase. Also by venturing into high margin oil production, the company's bottom line over the longer term looks secured to me.

British Petroleum shares its market space with Total S.A (NYSE: TOT), ExxonMobil (NYSE: XOM) and ConocoPhillips (NYSE: COP).

Company

P/E

P/S

Dividend Yield

Retained Earnings

British Petroleum

7.7x

0.34x

4.59%

70.3%

ConocoPhillips

11.05x

1.07x

4.61%

50.3%

Total S.A

7.9x

0.51x

6.15%

53.2%

ExxonMobil

9.56x

0.84x

2.5%

79.2%

 

British Petroleum has the lowest price to earnings ratio along with price to sales ratio. The company yields a healthy 4.6%, with a majority of its earnings retained.

Due to macroeconomic reasons, we believe that oil prices are on the up move. The company reported gloomy quarterly financial results, and expects similar performance in the third quarter as well. This gives investors a chance to invest in BP, while it’s still available at the current valuations. BP has a good mix of numbers and yields a healthy dividend, without straining its retained earnings. It is due to these reasons, that we believe that the stock is headed north.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.

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