Is it Worth Investing in This Oil Company?

Shares of BP plc (NYSE:BP) resumed their downward trend in recent weeks. One of the reasons for company’s decline may have been related to the tumble in the price of oil. But the main issue continues to be the lawsuits BP faces and its future performance. The uncertainty around the company’s future may keep pulling down its stock. But is it worth owning this company’s stock? Let’s review this issue in greater detail.

During 2013, shares of BP have slid down by 1%. In comparison, the S&P500 index rose by 9.6% and the price of oil increased by 1.7%. The chart below shows the normalized prices of the S&P500, oil and BP’s stock (normalized to December 31st, 2012).

BP & S&P500 AND OIL Price October 2012

Is BP Out of the Deep-end?

By the end of 2012, BP was able to allocate $42.2 billion towards funding the cost and fines of the 2010 oil spill. But BP isn’t out of the deep-end just yet. More than 160,000 claims were submitted under the Deepwater Horizon Economic and Property Damages Settlement. So if the company will be able to settle these claims, pay its fines, clean and restore the Gulf of Mexico spill within the amount it set aside, then the company’s uncertainty will diminish. The State lawsuit (Louisiana and Alabama) is still pending and is posing the biggest threat for the company. This lawsuit is likely to keep BP’s stock from rising as it will continue to pose a threat that BP will need to sell more assets or cut its dividend in the future. In the meantime, BP is slowly growing ( revenues) and its high dividend yield is making this company an interesting investment.

BP and Dividend

Due to the company’s stock tumble, the annual dividend yield of BP continues to lead the way among oil and gas producers: BP’s annual dividend payment of $2.16 per share, which comes to an estimated annual yield of 4.95%. In comparison, Exxon Mobil (NYSE:XOM) pays an annual is dividend of $2.28 per share, which comes to 2.6%; Chevron (NYSE:CVX) pays a yearly dividend of $3.60 per share – a 3.1% yearly yield. Moreover, the payout ratio of BP is one the highest for the industry: BP’s payout ratio reached in 2012 55%. Exxon’s payout ratio was only 22.5% and Chevron’s ratio was 26.5%. This means, BP investors not only receive a high yield, they also receive a high share of BP’s profit.

BP is also planning to buyback $8 billion of its shares, following the company’s sale of its 50% share in TNK-BP to Rosneft.  This step will put BP in the same path as Exxon and Chevron. Both Exxon and Chevron have been buying back their stocks in recent years: in 2012 Exxon purchased nearly $20.8 billion of its stocks back. Chevron bought $4.1 billion. So BP is paying back its investors via high dividend and buyback program. But will BP’s revenues continue to grow? One of the factors that will determine it is the direction of oil prices.

BP and Oil Prices

In recent weeks the price of oil took a hit and declined: During April the crude oil price fell by 4%. This decline didn’t seem to be related to a reaction to a fundamental change in the oil market. The decline in the price of oil may have adversely affected the future value of oil producers and thus (using DCF) pulled down the stock prices of oil producers. The price of oil has a mid-strong linear correlation with BP’s stock. Despite the recent fall in the price of oil, the quarterly average price of oil for the first quarter of 2013 was 7% higher than the previous quarter but 8% lower than the average quarterly average during the same quarter in 2012. This could affect the company’s profit margin in the first quarter of 2013.

BP and Profitability

As indicated in the chart below, despite the decline in the quarterly average price of oil in the fourth quarter to its lowest level in the past two years, the operating profitability of Exxon Mobil and Chevron didn’t diminish: the profitability of Exxon Mobil reached 15.4%; Chevron’s profit margin was 20%. On the other hand, the profitability of BP remained low at 3.6%. One of the reasons for the relatively low profit margin of BP is its provisions related to the oil spill.

BP profit margin April 2013

Considering the rise in the quarterly average price of oil, the profit margin of these oil companies might slightly rise in the first quarter of 2013. In such a case, these companies’ stocks may rally in the coming weeks.

Final Thoughts

I think BP isn’t getting enough credit for its recovery and the uncertainty around its future is less significant than the market estimates. Considering the recent steps the company implemented and the high dividend yield it offers, the company should be considered an interesting investment opportunity.

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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.