After an oil spill, a bumbling CEO—oh, and five years—is BP making a case to be considered undervalued?
BP (BP) rallied 5.1 percent on July 2 after the company said it settled federal, state, and local Deepwater Horizon oil spill claims. The hefty settlement is positive for BP shareholders, because it removes the uncertainty overhang in the stock.
According to the settlement terms, BP will pay up to $18.7 billion over 18 years, which amounts to around $1 billion annually. The company made $12.1 billion in profits last year.
BP’s shares are inexpensive: its book value is $36.26 per share, and since the stock is trading around $39, it has a price/book ratio of 1.07.
To improve its balance sheet, BP has implemented a plan for selling off its non-core assets. Since the Deepwater Horizon spill in the Gulf of Mexico five years ago, BP has sold off over $40 billion worth of assets worth. During the first-quarter earnings call, CFO Brian Gilvary said the company’s plan to divest $10 billion of assets between 2014 and 2015 have resulted in the selling off of $7.1 billion worth, which includes assets on the Alaskan North Slope and in the North Sea.
While the settlement is a positive development, it’s important to note that, per BP’s press release, it does not include the private suits (MDL 2185) by individuals.
Exploration is a key activity for BP and oil firms to build their sources for oil. At the end of June 2015, an oil industry consortium that includes both BP and Exxon Mobil Corporation (XOM) suspended its drilling in the Beaufort Sea in Canada due to regulatory challenges. The National Energy Board of Canada has tough rules that are meant to safeguard the arctic waters by preventing blowouts in undersea wells.
BP is still a value stock. The dividend yield is high at 5.76 percent and gives investors exposure to the energy market. Halliburton (HAL), which is trading new yearly lows, is another out of favor stock. The oil services giant is merging with Baker Hughes, a move that should mean cost cuts, higher revenue, and competitive strength as a bigger firm.
Written by Chris Lau
Disclosure: Author owns shares of BP.
Click on the interactive chart to view data over time.
1. BP p.l.c. (BP, Earnings, Analysts, Financials): Provides fuel for transportation, energy for heat and light, retail services, and petrochemicals products. Market cap at $120.97B, most recent closing price at $39.13.
2. Halliburton Company (HAL, Earnings, Analysts, Financials): Provides various products and services to the energy industry for the exploration, development, and production of oil and natural gas worldwide. Market cap at $35.17B, most recent closing price at $41.31.
3. Exxon Mobil Corporation (XOM, Earnings, Analysts, Financials): Explores for and produces crude oil and natural gas in the United States, Canada/South America, Europe, Africa, Asia, and Australia/Oceania. Market cap at $34.84B, most recent closing price at $81.60.
(Monthly return data sourced from Zacks Investment Research. All other data sourced from FINVIZ.)
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