It has been over two months since I last wrote about British Petroleum (BP). It is currently trading just about where it was when I last wrote about it. However, recent events of the last few weeks lead me to believe that British Petroleum will be on an upward trajectory for the next 12 to 18 months.
RECAP: 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 (LNG), and power and natural gas liquids (NGL). 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.
Recent Catalysts: British Petroleum should be buoyed by several events recently:
A. BP has received good news from the courts in recent days. A judge in New Orleans threw out RICO charges against BP. The judge also put Anadarko’s (APC) claims against British Petroleum on hold.
B. BHP buying Petrohawk for a 63% premium showed that energy assets are being undervalued by the market. This should help British Petroleum’s valuation over the long term and should provide good prices for any assets it decides to shed.
C. Conoco (COP) announced this week it was splitting off its refinery operations following the lead of Marathon (MRO). Given the market’s positive reaction to both companies decisions to spin off these operations, this gives BP another way to unlock shareholder value. Although the company has denied looking at this direction for now, it might be inevitable given it already plans to sell 50% of its U.S. refinery capacity.
D. The continued high price of gas, the declining popularity of the current administration and damage from the Gulf Oil Spill that was much, much less than anyone expected a year ago; should lead to accelerated permitting and exploration in the Gulf of Mexico.
Technical Support: Over the last year, BP has had solid technical support in the $42 to $44 range (See Chart), which is just below where BP is currently trading.
Valuation and Price Targets: BP sells in the bottom third of its five year valuation range based on P/E, P/S and P/B. BP sells at just six times this year’s projected earnings, provides a generous dividend yield of 3.8% and a projected 5 yr PEG of just 1.2; lowest among oil majors. S&P projects BP will average 14% annual earnings growth over the next three years, which is made possible by British Petroleum’s remarkable ability to replace production (18 years of 100% production replacement). Analysts’ targets also provide good support here. S&P has price of $58 on BP, Benchmark is at $70 and Oppenheimer has a target of $55.
Disclosure: I am long BP.