BP has overcome the biggest setback in its history to put itself in a position to reward shareholders with strong fundamental growth once more, says The Share Centre’s Graham Spooner.
The oil giant lost 53 per cent of its value in the two months that followed the Macondo disaster. The Deepwater Horizon explosion caused the largest spill in the petroleum industry’s history but Spooner believes that recent moves by BP’s management should secure its future.
“BP is still in the realms of transforming itself from the company it was prior to the Gulf of Mexico oil spill,” he said. “It plans to sell off more low-returning assets and invest in those which have higher growth opportunities. Growth seekers will be pleased to hear the company plans to invest $45bn in future projects.”
The stock has been out of favour among much of the industry following two tumultuous years that saw it cut its dividend and put it in the firing line of US politicians.
However, it has been a long-time favourite of M&G Recovery’s Tom Dobell. The FE Alpha Manager believes the company, which was built to be profitable when oil is just $60 a barrel, believes the road to recovery can still be a profitable one, provided the management can resolve the legal issues and avoid becoming a target of competitors.
Speaking to FE Trustnet last month he said: “The valuation of the business should imply a share price greatly higher than it is at now and unless the management gets its act together reasonably quickly, it is going to become lunch for somebody else in the industry.”
Spooner claims that BP has now staved off this threat with a series of major upgrades that have all boosted the share price.
“2011 was a year of consolidation for BP and it has now set itself on a recovery trajectory,” he said. “Dividends have been reinstated and between now and 2014 it expects to return to production in the Gulf of Mexico.”
“It also aims to continue growth of downstream operations earnings momentum, improve the margin mix of the portfolio, reduce uncertainties on the Gulf of Mexico liabilities, upgrade the Whiting refinery and complete 15 major upstream projects. Should these projects succeed, operating cash flow could improve by 50 per cent.”
Data from FE Analytics shows that the stock has lost more than 13 per cent over the last 18 months. BP has so far struggled to gain a foothold as uncertainty over its future still dominates its valuation.
However, Spooner believes BP’s recent decision to sell its 50 per cent stake in TNK-BP, the joint venture with Alfa Access Renova and a consortium of Russian billionaires, is likely to pave the way for some serious investment in the business.
“TNK-BP is a significant asset; it represents 30 per cent of BP’s total production and paid out $3.75bn in dividends to BP in 2011, compared to the $4.1bn BP paid out to its shareholders.”
“The cash generated from the sale would have many uses; it could either be returned to shareholders or used to pay off debts or held back for other projects. The new business should then be smaller but more streamlined, allowing it to focus on recovery from the Gulf of Mexico disaster.”
He added: “We believe that BP will achieve the much needed turnaround and should achieve a fair price for TNK-BP. With the recent pull-back in the share price, there is now more value to be had for long-term investors and we are therefore upgrading our recommendation to a ‘buy’.”
Our data shows that 385 of the 3,186 funds in the open-ended universe – or 12 per cent – list BP in their top-10 holdings.