The cash performance of oil major BP (LSE: BP) (NYSE: BP.US) continues to fascinate. Absorbing the costs associated with the firm’s 2010 Gulf-of-Mexico blow out disaster takes deep pockets, or strong currents of flowing free cash. With April’s first-quarter update, BP continues to prove that it has both.
Swimming, not sinking
In the first three months of the year, $8.8 billion washed into BP’s coffers and $600 million of that leaked out to finance Gulf-related obligations. It seems clear that the firm is coping with the ongoing financial drag from the oil spill and today’s 508p share price advertises the market’s verdict: BP is winning against adversity.
2010’s share-price nadir of around 300p seems but a painful memory to many shareholders. So far, the firm’s cumulative pre-tax charge for the Gulf stands at $42.7 billion, but BP admits that the final liability figure could be higher still as some financial fines and penalties remain unquantifiable.
So the company has been selling assets to supplement its operational cash flow. In 2013, the directors announced plans to raise a further $10 billion before 2015, of which it has already struck $3 billion worth of deals and realised $1 billion during quarter one.
Not just swimming, winning
According to the directors, 2013 was BP’s best year for upstream exploration in ten years. The firm drilled 15 wildcat exploration wells and seven found potentially commercial quantities of hydrocarbons wild frontiers such as India, Egypt, Angola, Brazil, and the Gulf of Mexico.
2014 started with nine exploration wells in operation and the firm delivering on its post-Gulf-disaster strategy of focusing on more active portfolio management, selling assets in order to target high-impact exploration opportunities. 2013’s deal in Russia illustrates, where BP owns a 19.75% stake in Russian state-controlled oil and gas enterprise Rosneft. In another buccaneering move given recent events, the firm has been ramping up its operations in the Gulf of Mexico too. Around ten drilling rigs defy nature to operate there and, in December, the firm announced its third significant Palaeogene oil discovery in the region. In many ways, BP seems to be banishing past demons with the kind of grit only oilmen possess.
As well as playing East and West with apparent impartiality, BP is active worldwide with developments in the Middle East, Azerbaijan, Brazil, Angola, the UK North Sea, and Greenland. Such activity seems encouraging as upstream activity drives future production and thus the firm’s prospects for growth. Last year, BP’s reserves replacement ratio scored 129%, excluding the impact of acquisitions and disposals, and 199% including net growth in BP’s Russian portfolio. Anything above 100% represents reserves growth so the news is good.
We’ll get an update on progress with the firm’s interim results due on 29 July.
Valuation
The forward P/E rating is running at about 10 for 2015, with city analysts predicting around 6% earnings’ growth that year. Meanwhile, there’s a forward dividend yield of 4.9% with the payout covered just over twice by forward earnings.
Given BP’s growth potential, the valuation looks undemanding. However, given the cyclicality of the sector, I’m not expecting any upwards P/E re-rating. I think a gradual share-price up drift, following profits and asset accumulation, more likely.