6 Reasons to Buy This Stock

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Brent crude has been hovering around the $110 mark, owing to improving macroeconomic indicators and tensions arising from the Middle East. Also, the falling number of natural gas rigs, coupled with gradually increasing demand, has pushed the prices of the commodity up by 65% from the lows it created this year. Due to this rationale, investing in oil and gas companies appears to be a good idea. BP (NYSE: BP) was recently ordered to pay $4.5 billion for the deadly spill in the Gulf of Mexico, but despite that the stock still looks good; here are a few reasons why.

1)      BP has been selling off its non-core assets with a plan to raise $37 billion. This would allow the company to get rid of its depleting non-core assets, and focus on the efficiency of its core assets. Also the cash generated from sales would allow the company to plan further expansions or acquisitions.

2)      BP is beginning to shift its focus on the production of high margin oil. BP recently announced that 15 of its new projects are well on track, and that it’s expecting production to commence by the end of 2014. Out of these 15 projects, 11 projects are in the high margin crude producing areas. Over the longer term, this would not only strengthen the bottom-line of the company, but would also help beat the inflationary pressures.

3)      Under an agreement, BP sold off its stake in TNK-BP to Rosneft in return for $17.1 billion cash and a 12.4% stake in the Russian company. BP will now own an increased portion of Rosneft, which is a big positive for BP as Rosneft operates proprietary marine terminals. These terminals cut down on export-related costs, and hence it would be safe to expect higher profit margins from BP’s Russian operations.

4)      According to several reports, BP may initiate a fresh share repurchase program in order to restore the shareholder value, lost due to the $4.5 billion penalty. Analysts believe that BP could use the cash generated from the sale of its stake in TNK-BP to finance the program. I believe that if share repurchase is not on the cards, the company could even choose to pay a special dividend from the proceeds of the deal.

5)      At the current price, shares of BP yield 5.24% with a modest payout of 30%. Its peers Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) yield 2.6% and 3.44%, respectively. The payout ratios for Exxon Mobil and Chevron  are 22% and 28%, respectively. Though BP has a higher payout ratio, another reason why its shares carry a higher yield is because of its continuous decline over the last couple of months. Keeping the growth prospects in mind, BP appears to be a great income-growth stock.

6)      Financial metrics look great. The company ended the quarter with a net profit of $3 billion against the estimated $1.8 billion, with operating cash flows of $6.3 billion. I believe investors won’t end up catching falling knives, because the company has many positive catalysts to arrest its decline.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Forward P/E</p> </td> <td> <p>P/S</p> </td> <td> <p>LT Debt/Equity</p> </td> </tr> <tr> <td> <p>BP</p> </td> <td> <p>7.94x</p> </td> <td> <p>0.34x</p> </td> <td> <p>35%</p> </td> </tr> </tbody> </table>

The oil and gas industry looks good. BP is restructuring its business operations and the company is venturing into the production of high margin oil to strengthen its bottom-line. The company is making fresh investments, which will strengthen its cash flows in the future . The shares appear to be undervalued, and I believe that BP would make a great investment choice.


PiyushArora has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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