BP Undervalued And Primed For Future Growth

| About: BP p.l.c. (BP)

BP (NYSE:BP) has been through quite a storm over the last few years with the Deepwater Horizon oil spill and the recent attack on the Amenas natural gas facility in Algeria. And, the company may be facing larger costs for resolving the Deepwater Horizon catastrophe than it previously planned per a March 5 ruling in a New Orleans court.

In the company's Q4 2012 earnings call held on February 5, 2013, Robert Dudley, Group Chief Executive for BP indicated the company had completed its final payment into a $20 billion trust fund for compensation related to the Deepwater Horizon incident. Mr. Dudley also noted the company has resolved U.S. Federal criminal charges with the U.S. Department of Justice and the SEC.

Once BP has the Deepwater Horizon issue in the rear-view mirror, the company is primed for growth, as the company plans to complete a program of 15 major projects which the company started in 2011 and is scheduled to complete by the end of 2014. The company started five new major projects in 2012: Galapagos in the U.S. Gulf of Mexico, Devenick in the UK North Sea, PSVM in Angola, Skarv in the Norwegian Sea and Clochas Mavacola in Angola (partial interest). BP is also the largest lease holder in the Gulf of Mexico with between 700 and 750 leases.

Additionally, BP has been investing in shale in the U.S., tight gas in the Middle East, heavy oil in Canada and has acquired new acreage in Brazil, Canada, Nambibia, Trinidad and Tobago, Uruguay and the U.S.

The company has been in the process of shedding non-core assets such as its Texas City and Carson refineries, some North Sea oil and gas fields and interest in the Yacheng gas field in the South China Sea. A total of $11.4 billion of non-core assets were divested during 2012.

Mr. Dudley indicated the U.S. is expected to become energy self-sufficient by 2030, however, growth in China and India will make those regions increasingly important as related to energy consumption.

BP's stock price has been on a roller coaster ride over the last year, as it plummeted, somewhat recovered and has taken a hit over the last couple of months as shown below:

BP's Price-to-Earnings (P/E) ratio of 11 is respectable, however, its Price-to-Sales (P/S) ratio of 0.35 puts the company squarely in the value range. With a P/S ratio of 0.35, BP's stock price is trading at a significant discount to its larger competitors Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM) which have P/S ratios in the 1.0 range. If BP's stock price were on par to Exxon Mobil/Chevron on a P/S basis, its stock price would be in the $120 range.

With BP getting closer to getting the Deepwater Horizon catastrophe in the rear-view mirror and its placement for growth, a protect investment in the company can be considered. A protected investment is considered, as the company could still face some unexpected surprises related to Deepwater Horizon. An example of a protected investment which allows for unlimited upside while protecting the downside is the married put position. The married put position may be entered by purchasing a put option against a long position in the stock. The month of expiration for the purchased put option is typically selected several months in the future in order to reduce the per-day cost of the "put insurance."

Using PowerOptions, a number of married put positions for BP were found for option expiration in October of 2013 as shown below:

The married put position using the 2013 Oct 41 put option is attractive, as it has a maximum potential loss of 7% before considering expected dividend payments. When taking into consideration expected dividend payments to be received during the holding time, the maximum potential loss is reduced to 4.7%, so even if the price of BP's stock goes to zero, the maximum loss which can be sustained is 4.7%. The details for the BP married put position are shown below:

BP Married Put Position:

  • Buy BP Stock (purchased or existing)
  • Buy BP 2013 OCT 41 put at $3.70

A profit/loss graph for one contract of the BP married put position is shown below:

For an increasing stock price, the value of the married put increases. For a stock price below the $41 strike price of the put option, the value of the married put remains unchanged. And, if the price of the stock increases to above the $41 strike price of the put option, then income methods may be applied in order to receive income and reduce risk as taught by RadioActiveTrading.com.

Look forward to hearing your comments below!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.