The global economy has started to show signs of recovery as equity indices across the globe reflect a strong upward trend. As the economy improves, analysts expect the outlook for the energy sector will also catch up. Particularly the growth in major developing markets like India, and China, will provide a sizable support to the industry. Some of the largest players in the industry, which include Exxon Mobil (XOM), Chevron Corp. (CVX) and BP p.l.c. (BP), have been looking forward to this improvement. According to BP's forecasts, oil and gas is expected to represent 53% of the total energy consumption by FY30.
Source: BP Annual Statement FY12
Recovery of British Petroleum
In this scenario, the big players are attempting to sustain their position in the oil industry as the market is still growing despite the decrease in prominence due to other energy resources. BP is also holding investments in renewable energy in order to diversify its portfolio in the energy sector. The recent results of the company's performance show that it has learned a valuable lesson the hard way.
Source: BP Annual Statement FY12
In FY10, the company reported a loss of $4.9 billion primarily due to the oil spill in the Gulf of Mexico and Macondo incident. Since then, the company has become strict in its approach toward safety related issues as shown in the chart above.
Some analysts have suggested that the incident is still in the way of BP's prospects. In my opinion, the incident is essentially a hazard common to the oil producing companies and therefore, the risk is not limited to one company just because the incident occurred with that company most recently. The risk factor is equally applicable to every other company. In fact, the strict measures taken by BP to reduce such events are expected to reduce the exposure of the company to such risks compared with the rest of the industry. In terms of costs, there is still some uncertainty regarding the overall damage to the company but the first-quarter results show that the company is making enough progress to deal with these factors.
BP's Relative Growth
The financial performance of the bigger players in the industry has been robust in recent years as a substantial improvement in revenues was witnessed.
The above chart shows the revenue performance of BP, Chevron and Exxon since FY09. All three companies have shown a growth in quarterly revenues but BP's performance, especifically in the last quarter, has produced phenomenal results, demonstrating a growth of 123.3% over the four-year period compared with the revenue growth of its competitors. Since the beginning of FY08, the company's total assets have projected a CAGR of 7.1% projecting decent growth despite serious threats to its performance.
Return for Shareholders
As mentioned above, the growth drivers of oil and gas energy are similar for the bigger companies to a huge extent. The key difference between BP and its competitors is with regards to the company's stance toward investor considerations.
The above chart shows the dividend yield of the three large companies. It is very clear that the company has been consistently offering a higher dividend yield than its competitors. When it comes to making a long-term investment, investors need a decent dividend yield to compensate for the long investment horizon. BP is clearly a long-term investment opportunity and the company is offering a dividend yield that aptly addresses its investor's concerns. At the same time, a buyback plan has also been announced, which will be completed over a period of 12-15 months. This will also contribute toward the increase in shareholder wealth.
Potential Risk Factors
The crisis in the eurozone and its adverse effects on the demand for energy-sector products has shown that any shift in the global economy's direction is a huge risk toward the performance of a company. Specifically companies like BP, which are to be considered for a longer period by investors, are sensitive to the global economic outlook. Similarly, hazardous incidents such as oil spills, and the subsequent damages caused by such events, are business risks, which apply to the whole industry. On account of the events in FY10, Moody's has shown restraint regarding the credit profile of the company but it has been accepted that the company is likely to improve its position by FY14 through an increase in operating cash flows.
BP is showing a strong growth prospect compared with the rest of the major players as it looks to benefit from the recovery in the global economy. In this situation, a buy recommendation is proposed for investors with an investment horizon of at least three years. In the short term, the stock price may be subject to some undesirable volatility due to concerns regarding the costs of earlier incidents. This is why short-term investors should refrain from considering the large players in the oil and gas industry.