Why BP Will Overcome Fears To Produce Long-Term Value

Jul.28.14 | About: BP p.l.c. (BP)

Summary

That management continues to uncover ways to reward shareholders with higher profits and dividends is a testament to their skill.

At around $50 per share, which is $10 lower than analysts' highest target of $60, BP presents a strong buying opportunity for current shareholders to add to current positions.

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.

Shares of British oil/energy giant BP (NYSE:BP) have performed well in 2014. The stock closed Friday at $50.92, down almost 1%. But shares are up more than 7% on the year to date, outperforming the energy sector's 5% gain.

Investors, however, aren't satisfied. And with BP due to report second-quarter earnings Tuesday there are questions whether this company, which has bounced back strong from its 2010 Gulf oil spill, is still the right way to play energy.

In fairness, BP's management continues to make the best of a bad situation. With geopolitical concerns affecting oil prices, it's remarkable that the shares, which have outperformed the likes of Exxon Mobil (NYSE:XOM) and Transocean (NYSE:RIG), are in positive territory at all.

Unlike Exxon and Chevron (NYSE:CVX), BP management continue to 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. And with the White House now warning of more potential sanctions towards that region, tension is beginning to mount. And to say nothing about the prices of crude oil, which some analysts predict may surpass $110 per barrel.

All told, there's never a dull moment in the world of BP. That management continues to uncover ways to reward shareholders with higher profits and dividends is a testament to their skill. On Tuesday, Wall Street will want to see based on the numbers that BP management has not lost focus. It's the only way these shares will trend higher.

The company is expected to reported $1.12 in earnings per share, which represents a 32% year-over-year jump, topping last year's mark of 85 cents per share. For the fiscal year, Wall Street is calling for earnings of $4.82 per share on revenue of $377.07 billion. These numbers suggest that investors expect strong operational results despite the geopolitical risks. I expect BP to answer the call.

Consider, unlike rivals Exxon Mobil and Chevron, BP has had no trouble delivering the goods. In the company's first-quarter earnings report, BP posted a 14% jump in its underlying replacement. This is an oil industry measure for earnings, which came in at $3.2 billion. Remarkably, the 14% jump included higher non-cash costs and divestitures.

During the quarter, BP absorbed a $39 million pre-tax charge related to restoration efforts of the Gulf spill. Still, the company generated roughly $9 billion in net cash from operations, an increase of 104% year-over-year. On Tuesday, I don't expect the numbers to sway that drastically.

Investors should keep in mind, however, that management guided for weaker production growth. This is dues to 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.

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 10 on 2015 EPS estimates, which is 5 points lower than the industry average. On the basis of management's commitment to return value to shareholders, BP's fair market value should reach $65 in the next 12 to 18 months.

Disclosure: The author has 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.