BP Looks Like A Solid Income Stock For 2012

| About: BP p.l.c. (BP)
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Aside from the Deepwater Horizon oil spill of two years ago, BP's (BP) biggest headlines have been with its Russian unit. Indeed, it now appears that the division's chief financial officer, Richard Sloan, will replace Jeremy Huck as the chief executive. While BP is calling the move a "planned rotation," I wouldn't be surprised if this rotation was expedited due to the company's inability to team up with state-owned Rosneft. Rosneft is now working with Exxon Mobil (XOM), and some shareholders of BP's Russian venture TNK-BP are even suing the subsidiary.

On the other hand, BP has also hammered out a number of new contracts that should be taken as a sign of the company's aggressiveness. For instance, BP is extending a contract with Aker Solutions, which will help BP keep five of its important Norwegian oil fields (Ula, Skarv, Hod, Valhall, and Tambar) running at the highest level possible. More specifically, Aker Solutions is expected to improve the field's oil recovery rate and economic life. BP also just signed a significant deal with Ensco (ESV). BP is hiring Ensco for use of a drillship, and this is an important move for BP to increase its deepwater oil output.

At the same time, BP has done a masterful job of selling its most peripheral assets to improve liquidity as it relates to possible oil spill liabilities. For instance, the latest news in this arena is BP's sale of its Canadian natural gas liquids and liquefied petroleum gas business to Plains Midstream Canada, a subsidiary of Plains All American Pipeline (PAA). This means that all of BP's remaining business in Canada will come under its BP Canada Energy Group subsidiary, which could make for an easier management process. Meanwhile, another important divestiture comes from BP's business in the UK North Sea. There, the company will sell its share of some southern assets to Perenco, which will allow it to focus more on its best North Sea assets.

In my opinion, this combination of moves, which aggressively pursues its current opportunities as well as sells off its less important ones, is the perfect strategy for BP right now. In fact, from a financial perspective, BP represents a terrific choice for investors right now. With a dividend yield of 4.4%, investors who are looking for additional retirement income should definitely consider BP. Furthermore, I would categorize this dividend as being extremely safe, due to BP's whopping operating cash flow. In 2011, BP had $22.154 billion of operating cash inflow, to be exact.

More information about BP's future plans can be found at the press release for its 4Q 2011 results. Based on what I'm seeing, exploration and production as well as refining and marketing could be highly lucrative going forward. The key here is that BP has a strong game plan despite divestitures that are happening at the same time.

CEO Bob Dudley says that he expects production excluding TNK-BP to be approximately flat in 2012, which is an achievement considering BP will probably be using less assets overall. Additionally, a number of important projects in the Gulf of Mexico, the North Sea, and Angola are underway, which could be a significant source of profit in 2013 and 2014. Specifically, I am expecting these projects to have a very high unit cash margin.

It's also worth noting that CEO Bob Dudley has been rather optimistic about BP's access to exploration as a whole. He had this to say:

We believe this resulted in more new net acreage than accessed by any of our peers in 2011. We now have a robust pipeline of opportunities with exploration prospects that will generate new resources and projects well into the next decade.

Another aspect of BP's production is outages of course, and the company is expecting less of those going forward as well.

I am also greatly enthused about BP's downstream business. One particularly important project is the upgrade of the Whiting refinery, and BP expects this to generate over $1 billion operating cash flow per year. I'm inclined to agree with this estimate based on BP's superior technology, and I'm also seeing some important work by TNK-BP that should also bolster BP's business going forward. In fact, BP will start reporting TNK-BP's results separately because of the size of the subsidiary, and the business's ability to take advantage of both brownfield and greenfield projects has been impressive.

TNK-BP has also, for the most part, been a beneficiary of Russia's favorable legal system. Meanwhile, BP appears to be making headway with its Limitation and Liability Trial. At least one source is reporting that a settlement may be in the works, which is encouraging considering this trial didn't start too long ago. Needless to say, BP figures to benefit from a short trial that can be reached by a fair settlement.

As for the traditional price ratios, BP is in a pretty solid position there as well. The stock's price to earnings ratio of 5.38, price/earnings to growth ratio of 1.28, and price to sales ratio of 0.36 are all lower than other major integrated oil and gas companies, like Chevron (CVX) and Exxon Mobil. Margins for BP have been low (15.4% gross and 8.34% operating), but this should improve as the company purges its poorest performing assets. In fact, this quote from Bob Dudley is a testament to BP's wisdom going forward:

BP is making choices - value over volume, strategic assets over non-core, and new opportunities over mature assets. We aim to build an ever stronger portfolio, upstream and downstream, generating enough cash both to invest for the future and to reward those who invest in us.

Clearly, this company has the cash flow generation necessary to provide strong dividends for a long time coming. I recommend anybody who values additional income (such as retirees) take a serious look at purchasing BP shares.

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