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Summary

  • Worries over sanctions against Russia hurting BP's stock.
  • Forecast lighter than anticipated by investors.
  • Upside evaluated at current levels.

BP plc (NYSE:BP) broke its upward trend at the end of June as tensions grew in Russia and Ukraine. BP acknowledged economic restrictions on Russia will have a "material" impact on its relationship with Rosneft. With BP down nearly 8 percent from its high of $53.48, investors should consider the upside in building a position in the energy giant.

Worry over Rosneft

Rosneft could suffer as tensions between Ukraine and Russia escalate. The firm will face sanctions from the West, which means lower cash payments for BP. For Q2, contributions from Rosneft improved, as BP earned $1 billion from the unit on 988,000 barrels of oil equivalent production daily. Despite the risks, Rosneft likely secured higher cash generation from forward crude sales with China.

Higher core focus

BP already shed $38 billion in assets, and plans to sell $10 billion more by the end of next year. $3 billion will come from upstream. The firm generated $7.9 billion in cash flow in the second quarter. Total debt stood at $24.4 billion. Even though the balance sheet is improving, investors might expect BP's stock will be range bound in the current quarter. BP forecasts lower gas production in the current third quarter. This is due to seasonal maintenance in Alaska and in the Gulf of Mexico.

Litigation from the Gulf of Mexico spill will continue to keep some investors away from BP. It booked $260 million in charges last quarter, which adds to the $43 billion charge overall. BP has only $700 million booked for future claims.

Share price support

A boost in dividends could limit further downside for BP's shares. In April, dividends rose by 8.3%. Since operating cash flow is forecast to reach up to $31 billion this year, investors should expect the dividend rate is sustainable. BP also plans to buy back $10 billion worth of shares. These funds originate mostly from the sale of TNK-BP.

Risks

Further sanctions against Russia could be material for Rosneft. The unit accounted for $1.3 billion in profits for BP for the first six months of this year, compared to $303 million last year. The lower payments to BP could limit upside in its shares in the short term.

Bottom line

Profits improved nicely for BP, and amounted to earnings of $1.18 per share in the second quarter. This is up from $0.86 per share last year. In the current quarter, production will drop due to seasonal turnaround and maintenance activities. This suggests BP's stock will trade in a narrow range in the short term. Tensions between Russia and the rest of the world continue to cast a cloud over BP. At current levels, BP is still attractive. The forward P/E is in the single digits. This is low compared to Exxon Mobil (NYSE:XOM), whose forward P/E is at 12.7. Should the stock fall more irrationally over the next few months, it will give investors a chance to build a bigger position in the company.

Source: BP Approaching A Buy At Current Prices