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BP (BP) is a large integrated oil and gas company with operations in over 80 countries throughout the world. It is one of the largest companies in the world as measured by revenue. It produces around 3.4 million barrels of oil equivalent per day and has proven reserves of over 18 billion barrels of oil equivalent.

The company has a hand in all aspects of the oil and gas industry, including exploration, production, refining, distribution, petrochemicals, and power generation. It also invests heavily in renewal energy and is active in biofuels, hydrogen, solar, and wind power.

Recent Performance

BP has grown normalized EPS from $1.82 in 2002 to $8.06 in 2011, representing an annual compound growth rate of 18%. For the past five years that growth rate has dropped to only 4%.

Free cash flow for the past 10 years has totaled $91 billion, far less than total net earnings over that same period of $158 billion. For the most recent five-year period these numbers are $44 billion and $81 billion, respectively. Last year the company reported net earnings of over $25 billion, but achieved a free cash flow of less than $8 billion. BP also spent $11.7 billion in acquisitions in 2011 after having to dispose of $7 billion worth of its assets in 2010 to help pay compensation for the Deepwater Horizon well explosion in the Gulf of Mexico.

Dividends-per-share hasn't grown over the past decade, and is currently around half of what it was two years ago. The Gulf of Mexico oil spill caused the company to lower its dividend significantly. If BP has now put its troubles with oil spills behind it, expect to see the dividend per share rise in the coming years. Currently, the yield is 4.5% and the payout ratio is 21%.

Quality Rating

Click to enlarge all images.

BP QR

BP's disastrous 2010 has brought down a number of its quality rating scores. Gross profit margin has been inconsistent and generally poor over the past 10 years. Capital expenditures are becoming a big problem for the big oil and gas players (see our report on Chevron). The cost of installing new facilities to produce new oil fields is a huge burden, and something will have to give -- most likely a rise in the price of oil.

Intrinsic Value

BP IV

A decent margin of safety is currently on offer, though the intrinsic value is forecast to go sideways at best in the coming years.

BP IV Graph

BP's performance in the early part of the decade was reasonably impressive, and the share price followed suit. The devastating effect of the Gulf oil spill is clearly illustrated. Right now looks to be a reasonable opportunity to buy.

Investment Grade Score

BP Inv Gr

With a margin of safety of 37 and a quality rating of 43, BP achieves an investment grade score of 16, which places it at number 106 on the Intrinsic-Valuation.com investment grade table. BP, for a number of reasons, is the sort of stock that will rarely offer a huge margin of safety.

Conclusion

BP is offering the highest margin of safety out of the oil and gas supermajors at present, so investors interested in these companies should see good value in BP. With a dividend yield of 4.5% it makes a good income play for those so inclined, and with a payout ratio of only 21% it still has significant room to raise its dividend in the coming years.

Source: BP Offers Value Plus Income