It appears that BP (NYSE:BP) is very close to settling the claims against it in the Deepwater Horizon oil spill in the Gulf of Mexico that occurred in 2010. The oil spill was a public relations disaster as the environmental damage arising from the spill was shown daily on television and in newspapers across the world. Just before the oil spill the company's stock was trading at almost $60 per share. It quickly lost over half its value to under $30 a share, and is currently trading around $40 per share. The trial court in New Orleans is close to approving a $7.8 billion settlement in the class action lawsuit brought by victims of the oil spill. This is a very large amount of money, and the company has put reserves away knowing it will need to pay much cash in compensation, but the company will not go bust, and is in good shape for investors in the future.
In 2011, BP produced 10% less oil and gas, but was able to sell it at much higher prices. As a result the company saw full-year profits increasing by 5.8% to $21.5 billion. BP saw profits increase 40% over the previous quarter for the third quarter of 2012. This is a profit of $5.2 billion for the quarter. This was also close to the $5.5 billion in profit the company saw in the third quarter of 2011.
Further good news is that the company is still generating a good deal of cash. It saw operating cash flow of well over $6 billion for the quarter. This has enabled the company to grow its dividend by 12.5% to $.09 a share. Dividends look to keep growing which will keep many investors happy.
While oil production is still significantly down from its pre-oil spill levels - BP was producing over four million barrels of oil a day before the Gulf of Mexico disaster and is now producing just over 2.25 million barrels of oil a day, the company is becoming more efficient and is making substantially more per barrel than it did over 2 years ago.
The company is well diversified and has not taken nearly as big a hit from low natural gas prices as its competitors ConocoPhillips (NYSE:COP), Exxon Mobil (NYSE:XOM), and Royal Dutch Shell (NYSE:RDS.A). ConocoPhillips saw earnings decline by almost a third with over half of that attributed to declining natural gas prices. Exxon and Shell are in better position to withstand the natural gas price decline, but each suffered in their earnings report more so than BP.
New projects in places such as Angola and the North Sea are expected to make twice as much money per barrel in the future, compared with what all BP's oil and gas assets made in 2011. The company is aggressively expanding its exploration base. As set out in BP's 10-point plan , the company is planning to bring 15 new major upstream projects into production by the end of 2014, 11 of which are in four higher-margin areas: the Gulf of Mexico, Angola, Azerbaijan, and the North Sea. All of these projects are on track and investors will begin seeing results by the end of next year. While these projects will increase production, it is important to note that BP is focusing on high margin areas. The company is growing smarter - each dollar of investment is going to return more than it used to return.
In contrast to Shell and Chevron (NYSE:CVX), BP's refining business is also doing well, delivering record profits in 2011 and continuing to show strong results into this year. New investments will lift profits and cash flow. Some analysts have expressed concern about the big oil companies increasing their spending; they worry that they won't make attractive returns. However, while BP has increased its investment spending to $22 billion in 2012, it is paying this off with increased returns. As long as the price of oil remains around $100 per barrel, BP reckons its cash flow will grow by more than 50% to $33 billion by 2014. This should result in plenty of surplus cash to pay higher dividends to shareholders. A drop of 10% in the price of oil, as some analysts expect, will reduce cash flow, but not so much that its investment spending becomes a problem.
What about the fallout from 2010's Deepwater Horizon accident? BP has already paid $7.8 billion in compensation. It has also paid $15.1 billion into a trust fund.
Yet despite all this, its balance sheet remains in good shape. BP estimates that the total cost of the clean-up operation will be about $40 billion. Not only is BP comfortably paying for this with extra borrowing, but it also expects to raise another $19 billion from asset sales by the end of 2013. Investors should not outright dismiss these payments, but there is no reason to be overly concerned, BP has shown it is able to deal with these payments going forward.
BP's shares are still very cheap. At less than $42, the stock is trading at a ratio of less than 8. With a dividend of $2.16 on a yield of 5%, BP stock is the most attractive stock in its sector. The valuation of this company is distressed, and no doubt a large reason for that is the news still surrounding the Gulf of Mexico oil spill. Investors should not be overly concerned with the aftermath of the oil spill. BP is solid and is a rare value for a large market cap stock in the energy sector. With its focus on expansion and its ability to earn more per barrel of oil than its competitors, it is fair to believe that this stock will cruise past its 52-week high of $48 per share and reach $60 in the second half of 2013.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.