BP (LSE: BP) (NYSE: BP.US) has been through the very thing that oil producers fear above most else, a drilling catastrophe followed by a massive oil spill — in fact, it was the largest accidental marine oil spill in the history of the petroleum industry.
It cost the firm dear, but as we saw at third-quarter results time on 29 October, BP is powering its way back.
Strong fundies
Reporting cash flow of $6.3bn for the quarter, BP told us that replacement cost profit was up 37% from the previous quarter to $3.7bn. Chief executive Bob Dudley said that “In 2011 we set a clear target for operating cash flow in 2014 and we are confident in its delivery“, and the firm looks set to achieve its target in impressive style.
The firm’s focus on careful cash flow and capital management looks to be on the mark, with capital spend for 2014 expected to be maintained around the $24-25bn range.
What has that done to the share price?
Beating the FTSE
Well, it has been picking up and shadowing the FTSE quite closely for a lot of this year, and it’s now gained nearly 16% to 1,250p since the beginning of January.
Whether that alone would be enough to beat the FTSE’s 13% over the same period would be a close call, but BP is also expected to shell out for a 4.7% dividend yield compared to the FTSE’s forecast average of 3.1%.
With a 26% rise in earnings per share forecast for the full year and with the shares on a forward P/E of still only a little over 10, I can really only see BP shares outperforming the FTSE in what remains of the year.
We still have some way to go to regain BP’s pre-disaster share price levels, but the firm’s actual fundamental performance despite the scale of the disaster might surprise some. BP did record a loss in the 2010 year of tragedy, but even then its full-year dividend still amounted to 35% of the previous year’s, and it’s been recovering quickly — we saw it back to a yield of 3.9% in 2011, and 4.9% last year.
What loss?
What all of this points to, for me, is that if you want to invest in the oil & gas business, you’re better off going for one of the giants like BP — just three years after a disaster costing on the wrong side of $40 billion, BP is looking like it’s only taken a mild bruising where lesser companies would have been destroyed.
In fact, those who were unlucky enough to have bought right at the high point of 642p in April 2010 before the oil hit the fan are only 23% down on their shares today, and they’ve had some compensation in total dividends since then amounting to nearly 9% of that peak price.
If that’s the worst that ever happens to one of your investments, you’ll be laughing all the way to a comfortable retirement.
BP a winner? For sure!