BP to See 30% Upside

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

Company Overview: British Petroleum p.l.c. (NYSE:BP) provides fuel for transportation, energy for heat and light, retail services, and petrochemicals products. Its Exploration and Production segment engages in the oil and natural gas exploration, field development, and production; midstream transportation, and storage and processing; and marketing and trading of natural gas, including liquefied natural gas, and power and natural gas liquids. This segment has exploration and production activities in Angola, Azerbaijan, Canada, Egypt, Norway, Russia, Trinidad and Tobago, the United Kingdom, and the United States, as well as in Asia, Australasia, South America, North Africa, and the Middle East.

Valuation: BP has had a good run since the depths of the Gulf oil spill crisis but still has not recovered its valuation prior to that event despite oil prices that have risen significantly over the last year. British Petroleum sells at 7 times 2011 and 2012's consensus earning and yields almost 4%. It sells at the low end of its five year range of valuation based on P/E, P/S, and P/CF.

Prognosis: British Petroleum's stock has justifiably been beat up by the aftermath of Gulf oil spill and its challenges in Russia. However, given its current valuation I believe it is undervalued and has several things working in its favor.

  1. The long term floor for oil prices seems to be permanently lifted over the last few years. Given the long term growth in demand from emerging markets and the current turmoil in the Middle East; I do not see this changing any time soon and the potential for further increases seems high. I don't believe this is currently reflected in the stock.
  2. Although the dividend yield is almost 4%, it has the potential to go much higher over the medium and long term. BP cut its dividend in half in response to the liabilities created by the spill. As the company addresses those liabilities, the potential to start to restore their previous payout ratio should increase.
  3. The company has made some core strategic decisions to focus on its core competencies. BP is selling its Texas refineries which should allow it to focus even more effectively on production and exploration.
  4. The damage from the Gulf Oil Crisis is much less than was originally expected. Tourism and fishing has returned to normal much faster than anyone projected. This should speed up how fast BP can settle claims and put this disaster behind it.
  5. BP has the second lowest production costs of the oil majors, is diversified across 29 energy producing countries, and has exciting opportunities including the Arctic region and Iraq. Rising gas prices and a changing political environment should also eventually speed up the permitting process in U.S. offshore assets
  6. Price target: Given BP's valuation, improving prospects and high oil prices; BP should be selling at a higher multiple. Even a very conservative multiple of 8.5 to 9 gives you a more reasonable price of $57 to $61. This is quite an improvement from the $44.28 BP currently sells at. BUY.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BP over the next 72 hours.