We have changed our stance to positive on BP plc (BP) based on its impressive earnings growth of up to 40 percent, dividend increase of 12.5 percent and its current restructuring efforts. Its rising refinery margin, operational efficiencies, plans to increase investment in its upstream business segment and high free cash flow growth in the coming years make it a good stock for value investors. In our opinion, it is expected to increase its production capacity significantly in the fourth quarter after the completion of its ongoing maintenance projects and on the expected start-up of its new lucrative projects. BP has strategically aligned its business operations to cater to the upcoming oil consumption growth of 0.9 million barrels per day in 2013, according to a report by U.S Energy Information Administration. Therefore, we recommend investors to take a long position in the stock.
BP's long term growth prospects are reflected in its plan to add 15 new projects by the end of 2014. Moreover, the company's 10-point plan seems to be extremely effective; its operations in Devenick field in the North America region started in early October and there are nine more projects which are in the pipeline and expected to start in this quarter. Moreover, in the downstream business segment, we believe the expected initiation of refinery modernization programs in the second half of 2013 would lead to higher growth and expansion in margins.
Another important development was the sale of its stake in TNK-BP to Rosneft, which has enabled the company to address the concerns of its shareholders. This divestment removes the uncertainty attached with its business operations in Russia. Moreover, the company management has decided to invest more in its upstream business segment, and to reshape its upstream business portfolio.
The company's Chief Executive Officer Bob Dudley revealed that the company will soon resume its supplies to the Northeastern region after the Hurricane Sandy catastrophe. Though it has no refinery in the area, its logistics operations were disrupted. Dudley believes that the company's strong supply chain infrastructure in the region will make it bounce back quickly.
The company registered net income of $5.2 billion in the third quarter, in contrast to $5.5 billion in the third quarter of last year and $3.7 billion in the second quarter of 2012. Primarily, the reason behind this sharp increase in profits (QoQ) is the company's ability to improve its margins in the downstream business segment. Timely delivery, operational efficiencies, and divestment of non-profitable businesses would enable the company to boost its profitability position going forward. The company has made its supply chain network much more efficient, which helped it increase its refining throughput. The company generated a high operating cash flow of $6.3 billion in the third quarter reflecting its ability to invest in profitable projects and sustain its competitive position.
Valuation:
BP is currently trading at a price to sales ratio of 0.3x, at discount when compared to its competitors Exxon Mobil (XOM) and Chevron (CVX) with P/S ratios of 0.94x and 0.96x, respectively. It is trading at a forward price to earnings of 7.5x, P/B of 1.1x and EV/ Revenue of 0.4x, which are at significant discount when compared to its peers in the industry.
Comp Sheet | |||
BP | Chevron | Exxon Mobil | |
P/S | 0.3x | 0.94x | 0.96x |
Forward P/E (2013) | 7.5x | 8.9x | 11x |
P/B | 1.1x | 1.67x | 2.5x |
EV/ Revenue | 0.4x | 0.9x | 0.9x |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
