Oil prices have reached today their lower price in almost 12 years. Crude prices have continued to fall sharply, and no sign of recovery fundamentally or technically has been seen yet, as shown in the charts below. The Brent crude oil price has lost an astounding 70.4% from July 01, 2014, price of $105.14 a barrel to its last price of $31.13 on January 13. WTI crude price has fallen 67.2%, in that period, the natural gas price has decreased 48.4%, and gasoline has lost 58.5% since July 2014.
Brent Crude Oil, February 2016 Leading Contract With 50 Day Moving Average
WTI Crude Oil, February 2016 Leading Contract With 50 Day Moving Average
Charts: TradeStation Group, Inc.
The British giant, BP p.l.c. (NYSE:BP), one of the world's five supermajors integrated oil & gas companies, has seen its earnings and shares price falling sharply, as a result of the crash in oil prices. In fact, yesterday BP's stock fell to its 52 week low at $28.65. Since July 01, 2014, the stock has already lost 45.9%. Also, the shares of the other majors integrated oil & gas companies have fallen sharply in this period; Chevron (NYSE:CVX) has lost 37.1%, ConocoPhillips (NYSE:COP) 53.3%, Exxon Mobil (NYSE:XOM) 25.8%, and Royal Dutch Shell (NYSE:RDS.A) has decreased 51.8% in this period.
Chart: TradeStation Group, Inc.
However, in my opinion, at the current price BP is an excellent long-term investment, first for the generous dividend yielding 8.4%, and second for a significant price appreciation when oil prices recover. Although there is no guarantee that the last 52 week low is the bottom of this cycle, and BP' stock might continue to fall, the upside potential is much higher than the downside risk. After all, the best opportunity to achieve high capital gains is when shares of a good company are trading near multi-year lows. Although no sign of oil price recovery has been seen yet, oil price will eventually recover sooner or later. As no one has anticipated crude oil plunging 70% in a year and a half, it is impossible at this moment to determine when oil prices start to climb. However, we can try to get some conclusions from the previous crash in oil prices due to the global financial crisis in 2008. WTI crude fell 63.1% in less than eight months from an all-time record of $143.28 a barrel on July 03, 2008, to $52.90 on February 19, 2009. However, after one year, on July 02, 2009, WTI price climbed 40.8% from February bottom, and after three years, on July 01, 2011, the oil price was 79.5% up from 2009 bottom, as shown in the table and chart below. Of course, current global economic conditions are different (for the better), and the same pattern has not been repeated. However, commodities prices are moving in cycles, and lower capital expenditures on exploration and production will eventually cause oil prices to rebound.
Chart: TradeStation Group, Inc.
In contrast to upstream operation's profitability that is directly correlated to oil prices, the downstream operation is benefiting from the continued high refining margins and strong demand for refined products. While BP's upstream profit before interest and tax fell 81.3% in its 3Q'15 compared to 1Q'14, downstream profit before interest and tax increased 127.7% in the same period. However, the combined upstream and downstream profit decreased 42.3% in the period, as shown in the chart below.
Source: Company's reports
BP has expressed the most important of its enduring principles - that of growing sustainable free cash flow and shareholder distributions over the long term. On the company's third-quarter conference call, Bob Dudley, Group Chief Executive, said that the company is committed to sustaining its dividend while it rebalances its sources and uses of cash in the current environment. previously, On July 02, 2015, BP announced that it would settle all outstanding claims related to the 2010 Deepwater Horizon oil spill; the $18.7 billion settlement will be paid out over an 18-year period (reducing its present value), and eliminates a worst-case scenario. In my view, the current annualized dividend of $2.40 is sustainable, and the yield is very high at 8.38%. The annual rate of dividend growth over the past three years was high at 12.2%, over the past five years was negative at -6.7%, and over the last ten years was at 3.6%.
Despite the impact of lower oil prices, the company has generated small free cash flow in the first nine months of 2015. In that period, operating cash flow was $13.3 billion, of which $5.2 billion was generated in the third quarter. This compares with $25.5 billion in the first nine months of 2014 and $9.4 billion in the third quarter of 2014. Excluding oil spill related outgoings, underlying cash flow in the first nine months was $14.3 billion. Organic capital expenditure was $13.2 billion in the first nine months of 2015 and $4.3 billion in the third quarter. The company received divestment proceeds of $2.6 billion in the first nine months of 2015, including $290 million in the third quarter. The weakness in oil prices, which weighed on the upstream segment, was partly offset by cost-cutting initiatives and strong marketing and trading results. In addition, the downstream segment posted strong results as margins benefited from lower costs.
According to the company, it is making strong progress on resetting both the capital and cash cost base of the Group. It now expects organic capital expenditure to be in the range of $17-19 billion per annum through to 2017. Group controllable cash costs are expected to reduce by over $6 billion by 2017 compared to 2014. With these plans in place and continued strong operating performance across its businesses, BP expects to rebalance organic sources and uses of cash by 2017 at an average Brent oil price of around $60 per barrel. Organic free cash flow is expected to grow after that at constant prices. On divestments, after completion of its $10 billion divestment program by the end of 2015 the company expects to announce a further $3-5 billion of divestments in 2016. From 2017 BP expects divestments to average the historical norm of around $2-3 billion per annum.
In my opinion, at the current price BP is an excellent long-term investment, first for the generous dividend yielding 8.4%, and second for a significant price appreciation when oil prices recover. The company said that it is committed to sustaining its dividend while it rebalances its sources and uses of cash in the current environment. Although there is no guarantee that the last 52 week low is the bottom of this cycle, and BP' stock might continue to fall, the upside potential is much higher than the downside risk. Although no sign of oil price recovery has been seen yet, oil price will eventually recover sooner or later. According to the company, it is making strong progress on resetting both the capital and cash cost base of the Group. It now expects organic capital expenditure to be in the range of $17-19 billion per annum through to 2017. Group controllable cash costs are expected to reduce by over $6 billion by 2017 compared to 2014. Moreover, BP has a pretty strong balance sheet, and its stock is currently trading below book value. At the end of 3Q'15, the company had $31.7 billion in cash and cash equivalents, its net debt was at $25.6 billion, and its net-debt-to-total-capital ratio was 20.0% at the end of 3Q'15.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.