Why BP Is A Buy For 2012

Mar.23.12 | About: BP p.l.c. (BP)

Like the boxer who goes down for the count then slowly rises to his feet before the referee gets the number 10 out of his mouth, BP has taken a licking but is poised to come out a winner. Like a one-two-three punch, company disasters, lawsuits and bad press pounded the company in recent years, but BP is making a comeback, conceding settlements and implementing aggressive public relations campaigns. Like most everyone else, I'm not fond of past tragedies, but I do see BP as a great long-term investment based on a few key points.

BP, the third-largest oil and gas company behind Exxon (NYSE:XOM), and Royal Dutch Shell (NYSE:RDS.A), operates under the umbrella of exploration and production with well-known retail brands such as BP Express and BP Connect, as well as over 24,000 service stations around the world. As of late, it has not been seen as a wise investment based on an eroding reputation and the potential of billions of dollars in fines, payouts and litigation.

There are three reasons I consider BP a good investment right now and all of them are based on a brighter future. First, the price of oil is going up. A rise in oil prices improves revenue and profit margins for oil and gas companies. Like Exxon Mobil, and Chevron (NYSE:CVX), BP is benefiting from rising oil prices being pushed up by positive U.S. economic data and sanctions enacted against Iran. If the situation with Iran gets worse, crude prices could increase once more causing positive results for these companies.

Many oil investors are picking Chevron over BP because of its low price-to-earnings multiple and because you don't see Chevron having to defend beach pollution on the evening news. But that is today. All of these oil companies are taking daily risks to recover oil from new frontiers and bring it to market. The new leaders will be those companies that can deliver with the least amount of risk.

The second reason BP is a good buy now is because what was feared before as severe penalties for the company turns out to be mere hand slapping in comparison. BP is enjoying generous leniency from the U.S. government. In 2009, the U.S. Department of Labor's Occupational Safety and Health Administration (OSHA), announced a nearly $85 million penalty for over 270 safety violations related to the company's failure to protect its workers in the BP Texas City, Texas, refinery explosion. In March, 2012, BP was released from criminal probation related to the incident. This was after being given a second chance to address numerous safety concerns. In other words, for BP, it appears that time is healing all wounds.

Additionally, BP is making settlements and improving its image. Recently, BP reached a $7.8 billion settlement deal with the 100,000-plus claimants suing the company for damages resulting from the April, 2010 spill. That is in addition to the $6.1 billion already paid out for over 220,000 claims.

Some of the lawsuits are still not settled and that is probably one of the reasons some investors shy away from BP. Even with the riffs, BP is still a good deal. One of the last ones (hopefully), is the battle BP has with Transocean (NYSE:RIG) and Halliburton (NYSE:HAL). All three blame each other for the Deepwater Horizon accident and are suing one another. But during all of this, BP is applying legal, though not very popular, political strategies, and is gaining momentum through approval of new oil drilling locations.

Finally, I recommend BP as a buy now based on the estimates. Consider that BP's most recent quarter showed revenue of $96.34 billion, with sales 19% higher than the prior-year quarter's $79.70 billion. Earnings per share were $0.40. The nine earnings estimates compiled by S&P Capital IQ averaged $1.60 per share. GAAP EPS of $0.40 for the fourth quarter were 38% higher than the prior-year quarter's $0.29 per share. The future outlook reveals next year's average estimate for revenue to be $362.34 billion. The average EPS estimate at $6.73.

BP shares before the 2010 disaster were trading around $60, but simply couldn't hold on during the crisis and shares have been hovering around the $50 mark. Many investors believe that it will be quite a challenge for BP to climb back up to yesteryear's price because of all the troubling lawsuits and publicity, but I agree with Barron s that BP's price already discounts the risk. They are still the least expensive of the big oil companies. It is true that their long-term growth rate of 5% falls below the industry average, but BP's shares provide investors with 4% yield and a return on equity above 25%.

Thanks to liability concerns from the April, 2010 oil spill, BP trades at nearly 6 times earnings--- a very low multiple. While there may still be some future uncertainty as to the company's ultimate liabilities, BP generates plenty of cash flow and the company continues to pay shareholders a 4.1% dividend yield. With the price of oil climbing higher, BP will earn even more cash flows. Competitors like ConocoPhillips (NYSE:COP), trade at multiples above BP and have a lower yield. ConocoPhillips shares trade for 8.6 times earnings and yields 3.4%, respectively. In time though, as BP gets further away from the litigation over disasters, the valuation gap should close and its shares will grow in value.

BP has made honest changes to protect worker health and safety, protect the integrity of the environment, and to search, manufacture, and deliver alternative sources. Its media blitz is striving to improve its image and it is working. BP may have been punched around and will have some scars, but it is still in the fight for the long haul.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.