It wasn’t that long ago that BP PLC (BP) was one of the most hated companies in the world. The company had a big oil spill in the Gulf Coast region and suffered major hits to its profitability for a year. BP slashed its dividend and things looks bleak. I even considered selling some of my shares because the free fall was so great. Now things have stabilized and the company has even reinstated its dividend. BP looks like a solid investment again.
BP Company Analysis
BP currently trades at just 1.2 times book value, 0.4 times sales, and 8 times free cash flow. Shares trade at under 6 times earnings which is not unreasonable for a company in the oil and gas sector. BP’s strength lies in the massive amount of free cash flow that the company generates. BP has generated nearly $17 billion in cash flow from operations. The company produced a substantial amount of free cash flow as well before the oil spill. Capital expenditures and payments into the claims trust have turned cash flow negative the past two years. Cash flow should return to a positive level when payments end in 2013.
The recent rise in oil prices above the $100 level will benefit the company as its refining business will boom in profitability. The true value in BP will not be seen for years until all of the claims are settle and the company can return to its production levels before BP. This will take time since BP will have to get governmental permission to resume all drilling operations in the Gulf of Mexico. Like most oil and gas companies, BP has massive amounts of debt but the company should be able to handle those repayments and restructure any near term debt maturing.
BP will have to become more effective at public relations and risk management as the company cannot afford another major disaster. The company’s reputation has taken a hit and the management is now taking steps to rebuild it. BP will also be affected by the collapse of its deal with Russian company Rosneft. BP lost an EPS catalyst when the $16 billion dollar deal collapsed. Rosneft recently struck a deal with Exxon instead. BP will need to replace the lost future revenue stream from the collapse of the deal.
The oil spill disaster is still weighing shares down as the stock trades at nearly half of its former level. BP is attractive right now because of its $1.68 annual dividend. It’s dividend is easily sustainable based on its earnings per share of over $6.50 per share. BP has a current yield just south of 4%. The yield is better than most competitors including Chevron (CVX), Exxon (XOM), and ConocoPhillips (COP).