For investors looking for a leading integrated energy company that is currently trading at a discount compared to its competitors and offers a solid dividend, BP PLC (BP) is a company worth further investigation.
EV/EBITDA = Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization
In the next section, I will use the EBITDA to calculate the EV/EBITDA. The adjusted EBITDA takes into account foreign exchange and share-based payment expenses. The EV/EBITDA ratio is one of the most commonly used valuation metrics, as EBITDA is commonly used as a proxy for cash flow available to the firm. Integrated oil and gas stocks typically have an EV/EBITDA ratio that trades in the 4.0x to 5.0x trading range.
Enterprise Value or EV = Market Capitalization + Total Debt - Cash and Cash Equivalents.
- EV - $149.457 billion + $50.284 billion - $29.499 billion = $170.242 billion
- EV = $170.242 billion
- EBITDA = $46.836
- EV/EBITDA = 3.63
As the Integrated oil and gas sector often trades in the 4.62 trading range, an EV/EBITDA ratio of 3.63 indicates at current levels the stock is trading just fair value compared to other companies in its sector.
Why is BP Undervalued?
The main reason why BP is undervalued compared to its such competitors as Royal Dutch Shell (RDS.A)(RDS.B) and Chevron (CVX) is the uncertainty around the company's losses over the oil spill aftermath In a recent article posted on Yahoo.com, the article discusses some of the continuing issues revolving around the spill. The article states:
"BP on Tuesday asked an appeals court to review a ruling upholding a multibillion-dollar settlement to compensate victims of the company's 2010 oil spill in the Gulf of Mexico."
As this case continues, I believe BP will trade at a discount compared to its competitors. Other reason for the company being undervalued is the stagnant price of oil moving forward.
Oil Price estimates
Adding to the issue listed above, the EIA has estimated that oil prices will remain volatile but stagnant over the next few years. In 2014, WTI crude oil is projected to average $93/bbl while in 2015 estimates are that WTI averages around $90/bbl. There will be many variables that create volatility over the next few years. As the chart below indicates, WTI could range from ~$120.00 to ~$80.00 per barrel.
Even though the price of oil is expected to remain relatively stagnant over the next few years, there is a different story for the price on Nat Gas. The EIA [pdf] believes the demand is growing for natural gas. In its Annual Energy Outlook 2013, the EIA notes that exports will be a driving factor in the increased demand for natural gas over the long term.
"Exports (will) continue to grow at a rate of about 17.7% per year from 2020 to 2040. Net exports in 2020 are less than 1 percent of total consumption; in 2040 they are 12 percent of consumption."
In the chart below, the EIA displays five different scenarios regarding the price increase of Natural Gas. These scenarios are based on a multitude of events. They range from a shortage of natural gas where the price increases very quickly, to a glut of resources where the price acceleration is much slower.
Global consumption Oil
As the price of oil is expected to average just over $90.00 in the next 2 years, global consumption is expected to continue to grow.
According to the EIA, global consumption grew by 1.2 million bbl/d in 2013. The organization expects global consumption to grow by a similar pace of 1.2 million bbl/d in 2014 and increase to 1.4 million bbl/d in 2015, exceeding 93 million bbl/d by the second half of 2015.
BP in the Gulf Of Mexico
With exploration and production in the Gulf of Mexico expecting to be robust in 2014, BP is looking to capitalize on this. At the end of 2013, BP added two drilling rigs to the deepwater Gulf of Mexico, bringing its fleet there to a company record of nine rigs.
In the GOM, BP added the West Auriga, a new ultra-deepwater drillship, which is under contract to BP from Seadrill Ltd. (SDRL). BP also added the reconstructed drilling rig "Mad Dog", which is an oil and gas production platform.
Recently, BP along with ConocoPhillips (COP) made a huge find at its Gila prospect, in the deep-water U.S. Gulf of Mexico. The discovery represents the first major find by BP in four years since the gulf spill disaster.
As stated earlier in the article, BP PLC is undervalued. In the section below, I will use the Discounted Cash Flow to establish how much the price is undervalued and what would constitute fair value.
Discounted Cash Flow
I believe using the Discounted Cash Flow valuation model for BP PLC to be fair because DCF analysis can help one see where the company's value is coming from and one can generate an opinion based on that.
Even though there are variations in calculating this formula, this model is based off of a terminal value of $216.382B and a WACC of 6.23%. The terminal value $216.382B is based off of the company trading at 4.62x EBITDA, which is the EV/EBITDA value for the industry. At this point in the market, using the valuations above, I have concluded BP's current value to be $64.57 per share.
As of January 25th, BP's stock was trading at $47.75. Using the Discount Cash Flow Formula, this indicates the stock is trading at a 35.60% discount to today's price.
I believe if you added a small position here, accumulated over time, and collected the 4.80% yield while the market digested the Gulf Spill Disaster long term, this would reap rewards for the investor.
As BP PLC continues to resolve issues surrounding the Gulf Spill Disaster, I believe the stock will continue to be undervalued compared to its competitors. As time goes on and the market digests issues around the Spill, I believe the valuations will begin to recover. As stated earlier, if you added a small position here, accumulated over time, and collected the 4.80% yield while you wait, I believe the investor will be rewarded. Even though the next year or so could be quite volatile and the company predicts limited growth over the next few years, BP PLC pays a nice 4.8% yield to wait for conditions to improve. So if you are looking for a leading integrated energy company that is currently trading at a 35.60% discount to today's price, BP PLC is a company worth further investigation.