Why BP Is Headed To $60

Apr.30.14 | About: BP p.l.c. (BP)

Summary

Management continues to make meaningful progress to move the company forward.

Russia's situation will have very little impact on BP's long-term plans of returning value to shareholders.

The shares are trading at a P/E of 6, which is half of Exxon and 4 points lower than ConocoPhillips.

There's never a dull moment in the world of British oil giant BP. Not only has the company done a remarkable job recovering from the 2010 Gulf of Mexico rig explosion, during that span, management has figured out ways to raise the company's profits and reward shareholders with strong dividends. But it seems the company's execution has been "too easy." Now management must deal with the unfortunate situation in Russia, where BP owns a 20% stake in Rosneft (OTC:RNFTF), an oil producer controlled by the Kremlin, which the U.S. just slapped with sanctions.

These issues aside, BP management, particularly Chief Executive Bob Dudley, has never lost focus on the company's operations. Although rivals like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) have had recent struggles with production growth, BP investors have been shielded with relatively better production. And if the company's first-quarter earnings results were any indication, 2014 looks like it will be an even stronger year.

Tuesday, BP reported first-quarter revenue of $92.98 billion, down from $107.2 billion in the year-ago period. The company's underlying replacement, which is an oil industry measure for earnings, came in at $3.2 billion. Note, this is a 14% jump from the fourth quarter, during which it reported an underlying replacement of $2.8 billion. This resulted in earnings of $1.05 per share. While this figure is not as strong when compared to last year (down 24%), the figure was also adversely impacted by higher non-cash costs and divestitures.

As noted, the company is still recovering from the Gulf of Mexico spill. Accordingly, during the quarter, BP absorbed a $39 million pre-tax charge related to restoration efforts. Still, the company generated roughly $9 billion in net cash from operations. This is a remarkable jump of 104% year-over-year. Last year, net cash stood at $4.3 billion. All told, management said that it's incurred roughly $43 billion in pre-tax charges related to the spill that caused 200 million gallons of crude oil to make its way across 16,000 total miles.

Despite the dip in earnings, management showed the confidence to announce that it is increasing its dividend by 8.3% to 9.75 cents per share, which will be payable in June. This means that BP will approach the end of its current $8 billion buyback program. That the company also plans to divest $10 billion by the end of 2015 means that shareholders will continue to see cash benefits.

In terms of guidance, management expects second-quarter production levels to show a sequential decline. The company said that this is due to "major turnaround activity" in the North Sea and Gulf of Mexico regions. But the company doesn't expect the impact to be as significant as what the company experienced in the second quarter of 2013.

This was, without a doubt, an impressive start to 2014. It was shows that management is continues to make meaningful progress to move the company forward. The uncertainty surrounding Russia will serve as a near-term overhang. But one way or another, there will be a resolution. To what extent it affects BP's ownership stake in Rosneft remains to be seen. But what is clear, though, is that it will have very little impact on BP's long-term plans of returning value to shareholders.

With BP stock trading at around $50, which is $10 lower than analysts' highest target of $60, I think this presents a strong buying opportunity for current shareholders to add to existing positions, or for those on the sidelines looking for exposure in energy. The shares are trading at a P/E of 6, which is half of Exxon and 4 points lower than ConocoPhillips (NYSE:COP). On the basis of management's commitment to return value to shareholders, BP's fair market value should reach $60 in the next 12 to 18 months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's energy sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.