When I think of oil major BP (LSE: BP) (NYSE: BP.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Promising exploration pipeline
BP described 2013 as its best year for upstream exploration in ten years. The firm drilled 15 wildcat exploration wells and seven found potentially commercial quantities of hydrocarbons in places such as India, Egypt, Angola, Brazil, and the Gulf of Mexico.
2014 kicked off with nine exploration wells in operation as the firm’s strategy since the Gulf-of-Mexico disaster digs in. Since the disaster, BP has re-focused and pursued a policy of more active portfolio management, selling assets in order to focus on high-impact exploration opportunities around the world. 2013’s deal in Russia seems part of that plan, where BP collaborated with, and now owns a 19.75% stake of, Russian state-controlled oil and gas enterprise Rosneft. However, perhaps counter-intuitively, the firm has been ramping up its operations in the Gulf of Mexico too and now has a company record of 10 drilling rigs in operation there and, in December, announced its third significant Palaeogene oil discovery in the region.
Currently, BP is also pursuing exciting developments in the Middle East, Azerbaijan, Brazil, Angola, the UK North Sea, and Greenland. Upstream activities lead to tomorrow’s production and BP’s renewed exploration vigour since 2010 bodes well for the companies forward growth prospects. With 2013’s full-year results the firm’s reserves replacement ratio was running at about 129% for the year, excluding the impact of acquisitions and disposals, and at around 199% including net growth in BP’s Russian portfolio. That’s encouraging, as anything above 100% represents reserves growth.
 2) Strong cash flow
Active exploration fuels cash flow, which provides the means for investment in further growth and to support the firm’s progressive dividend policy. BP’s record on cash generation is impressive:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Revenue ($m) | 239,272 | 297,107 | 375,517 | 375,580 | 379,136 |
| Net cash from operations ($m) | 27,716 | 13,616 | 22,154 | 20,397 | 21,100 |
| Adjusted earnings per share (cents) | 88.49 | (19.81) | 135.93 | 60.86 | 123.87 |
| Dividend per share (cents) | 56 | 21 | 29 | 34 | 37 |
Strong cash flow is one reason that BP managed to navigate through the choppy waters left in the wake of 2010’s Gulf of Mexico oil disaster. When the financial obligations resulting from the oil blowout finally trail off, BP will be able to put even more investment into exploration growth. On that point, the future looks bright.
What now?
BP’s forward dividend yield is running at about 5.2% for 2015, which looks attractive. However, I’m mindful of the cyclicality inherent in the oil industry, which could hold back the firm’s share-price progress.