BP: A Potential 8.4% Or An Entry Of 36.10 In 6 Months

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

The outlook for BP Plc (NYSE:BP) is improving as the worst news appears to be priced in. At such times, it makes sense to sell puts as the downside risk is limited. If the shares are assigned to your account, you have the opportunity of getting in at a pretty good price. If the shares are not assigned to your account, you earn a pretty good rate of return within a short period of time. In this case, you could walk away with an extra 8.4% in roughly six months.

There are many reasons to consider BP Plc going forward. Two major headaches will soon be out of the way. The company is about to make their final payment to the victims of the GoM oil spill. The final installment is scheduled to be made in the 4th quarter. They are in the process of getting rid of their JV stake with TNK-BP. They are expected to get between $10-$15 billion in cash and in excess of 12.5% of Rosneft's stock.

In the second quarter it commenced production at Galapagos in the GoM and Clochas-Mavacola in Angola. There are plans to bring another six projects online before the end of 2012.

It is getting rid of its non-core upstream properties while at the same time creating a portfolio with potential for stronger growth from a smaller base. It sold its refinery in Carson, California, and also plans on selling the Texas city, Texas refinery. The company kept three refineries with the greatest competitive advantage which should improve returns going forward. The three refineries it kept are Cherry Point, Toledo), and Whiting. The Whiting refinery is being upgraded to process larger volumes of heavy crude from Canada. It should be fully operational by the middle of 2013. The Toledo refinery is a 50-50 JV with Husky Energy.

Management has stated that they intend to complete exploration wells in Namibia, Angola, and the North Sea in 2012. Results from drilling in block 26 in Angola, where the company has a 40% stake are expected shortly. The results in these pre-salt fields could mirror those of Brazil's Lula field, which proved to be the biggest find in the America's for over 2 decades.

The company has major project ramp ups underway in Atlantis and Mad dog, which will likely boost output when these fields come online by third quarter 2012. In 2012, BP expects organic capital expenditure to be around $22 billion. This bodes well for the company's future as it will be beneficial for the expansion plans and help in increasing revenues. The availability of gas in the Taurt North and Seth South discoveries in the North El Burg Offshore Concession and the winning of two deepwater exploration and production blocks in Trinidad and Tobago are recent examples of organic growth.

The company plans to drill 12 exploration wells in 2012. The cash margins per barrel on these projects are projected to be double the average of its existing portfolio. If this comes to pass, it should boast cash flow. Management has stated that half of any increase in cash flow would be spent on growth Capex, and the balance would be spent in increasing share value via an increase in dividends and or share buybacks.

The nimrod prospect where BP holds a 45% stake is estimated to contain 4.9 billion barrels of oil.

It obtained 43 new drilling leases in the Gulf of Mexico in June of this year and management wants to boost its operations in the Gulf around four production hubs with the intent of employing up eight oil rigs by the end of 2012.

It offers a good yield of 4.5% and Zack's projects that EPS will increase from an estimated $4.42 in 2012 to $6.00 in 2013.

The company also sports an excellent interest coverage ratio of 22.8 and a low payout ratio of 33%.

Lastly, management is also expected to deliver final investment decisions in over 10 new projects between 2012 and 2014.

How does BP stack up against the competition?

BP Plc versus Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM)

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Charts and tables of interest

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When the price of the stock starts to trade above the consensus EPS line, it usually signals higher prices.

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Suggested Strategy

The stock has been putting in a series of higher lows since the 31st of May. This is a bullish pattern and is usually indicative of higher prices. As long as it does not close below $40.33 on a weekly basis, the short to midterm outlook will remain bullish. A weekly close above $44 should result in a test of the $48-$50 ranges.

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The April 2013, 40 puts are trading in the $2.43-$2.48 ranges. The stock is currently consolidating and could test the $40.30-$41.00 ranges. If the stock trades within the stated ranges, the puts trade in the $3.10-$3.30 ranges. We will assume that the puts can be sold at $3.10 or better if the stock trades down to these ranges.

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If the stock trades below the strike price, the shares could be assigned to your account. Your final price in this case would be $36.90 (strike price minus the premium). If the shares are not assigned to your account, you walk away with a nice gain of 8.4% in roughly six months.

If you have a change of heart along the way and feel that the stock could trade below the suggested strike price, you can always roll the put. Buy back the original puts you sold and sell new out of the money puts.


The negative news appears to be fully priced in the stock. It has been putting in a nice bullish formation of higher lows since the 31st of May, and as long as it does not close $36.25 on a weekly basis, the long-term outlook will remain bullish. On the short to midterm time frames the outlook will remain bullish if it is able to hold above $40.33. A close below this level could result in test of the lows.

EPS charts obtained from zacks.com. Some of the research data used in this article was obtained from zacks.com. Options tables and competitors data sourced from yahoofinance.com. Options profit loss charts sourced from poweropt.com

It is imperative that you do your due diligence and then determine if the above play meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware

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

Business relationship disclosure: This article was prepared for Tactical Investor by one of our analysts. We have not received any compensation for expressing the recommendations in this article. We have no business relationships with any of the companies mentioned in this article.