The Bull Case For BP

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

The past couple of years have been challenging for BP plc (NYSE:BP). After the deepwater horizon explosion and the oil spill in the Gulf of Mexico, BP's stock price reflected an extremely downward trend. Litigation and settlement costs remained major factors for the negative valuation of the company. The negative consequences can be estimated by the company's collapsed stock price. The shares were trading near $60 per share in April 2010 and by June 2010 it went down to $30, reflecting a 50% downfall. However, the dynamics have now been shifted.

Since then, the company has sold various assets to offset tens of billions of dollars in litigations while the rest of the claims will be settled sometime in 2014. In addition, the company recently negotiated two deals, the successful completion of which will strengthen the long term growth prospects of the company.

BP signed a $45 billion deal to pipe natural gas from Azerbaijan to Europe. The constructed pipelines will reach Italy through Turkey and Greece. The construction of these pipelines is planned to reach Turkey by 2018 and Europe in 2019.

Highlights of the deal

  1. The gas produced from Azerbaijan's Shah Deniz field would immediately be expanded by 1.4 billion cubic meters per year, which currently holds an estimated 1.2 trillion cubic meters of natural gas.
  2. The initial supply of gas contributed by BP equals about 1.5 percent of Europe's total consumption. However, that will increase with the passage of time.

Strategic Benefits

  1. BP will emerge as a strategic stakeholder by lessening Europe's reliance on Russian exports which supplies about a quarter of Europe's gas. The pipeline will increase the energy security by providing additional routes and a new source of gas for Europe.
  2. There are a number of countries from which gas can be transported to Europe and the construction of the pipeline will ensure a strategic position for BP as the pipeline will accommodate gas from other supplies

Oman Deal

BP signed a $16 billion deal with the government of Oman that requires BP to undertake a difficult oil drilling project in the Arabian Desert. Accordingly, BP will drill some 300 wells in the Khazzan tight gas project over the next 15 years.

Highlights of the deal

  1. The project aims to extract around one billion cubic feet "BCF" per day of gas while the total expected development is around 7 trillion cubic feet of gas.
  2. The Omani government will take 55 percent of the gas sales revenues while the rest will be divided among the partners according to their ownership ratio i.e. 60% of BP and 40% of OOCEP.
  3. The construction on the project will begin in 2014and it will start yielding gas in 2017.

Future prospects

  1. The analysts at the New York Times observed that the project would be viewed as a concrete step to unearth natural gas in the Persian Gulf region which the energy industry believes may have large undiscovered gas resources.
  2. BP would also produce 25000 barrels of associated liquid fuels a day, which will be sold at much higher prices than gas.
  3. Although the tight gas projects are more difficult and expensive than other sources the successful extraction, particularly in Persian Gulf Region, would mean an unmatchable strategic advantage for BP.
  4. The returns are high while the risk has been managed but investors need to keep a closer look at any recent developments.

Gulf of Mexico Will Supplement Future Growth

By adding two drilling rigs in the area bringing its total Gulf fleet to nine, BP has built the largest fleet ever in the Gulf of Mexico. The company's investment in the Gulf signals an interest in reviving the drilling activity which fell suddenly after 2010 owing to BP's Deepwater Horizon crisis. Its importance can also be determined by the fact that the company plans to spend $4billion per year for the next decade to increase the production.


BP is offering investors an almost 5% dividend return while the company's turnaround continues. The dividend yield is almost double that of Exxon's 2.26% while almost 1.5% higher than Chevron's 3.27%. Considering BP's PEG ratio (5 years expected) of 3.82%, I believe that the stock is not fairly valued and it deserves to be traded at a higher price.

BP is currently trading on the forward earnings price multiple of 9X cheaper than competitors Chevron (10.2X) or Exxon Mobil (11.8X). I strongly believe that this gap will narrow over the coming year as the company finalizes its litigation settlements. Moreover, the new deals will also strengthen the company's long term prospects. It seems that the tough times are over for this company.

While the stock price is relatively cheaper, BP seems to be an attractive investment opportunity for investors who seek a stable income stream.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.