Today I am outlining why BP (LSE: BP) (NYSE: BP.US) could be considered an attractive addition to any stocks portfolio.
Asset sales beef up efficiency drive
In a bid to repair its smashed-up balance sheet following the 2008/2009 financial crash, BP underwent a vast asset-shedding scheme that saw it rid itself of $38bn worth of assets by 2012. And last autumn the company announced plans to shed a $10bn worth by the close of next year to further cut costs and bolster its reserves, and most recently sold its Hugoton gas project in Texas for $390m.
The effect of this vast restructuring has had a detrimental effect on current production, and reported output slipped 6% during January-June to 2.1 million barrels of oil equivalent per day. But over the long-term, BP’s decision to focus on what it considers to be the most earnings-efficient projects could deliver substantial returns for shareholders.
A top-drawer income selection
Not only has BP’s transformation drive substantially enhanced the firm’s capital pile and reduced the strain on future capital expenditure, but the influx of extra cash has also gone a long way to building shareholder rewards.
Just last month the firm confirmed its desire “to use the post-tax proceeds from these divestments predominantly for shareholder distributions, with a bias to share buybacks.” BP had already repurchased $8bn of equity following the sale of its stake in TNK-BP in 2013.
On the dividend front, BP lifted the full-year dividend 8% last year to 37 US cents per share, and last month decided to lift the second quarter dividend by the same percentage to 9.75 cents.
Should BP keep payouts rolling along at this rate, investors can look forward to full-year payments in the region of 40 cents and 43 US cents in 2014 and 2015 correspondingly, projections which create appetising yields of 5% and 5.4%.
Risks now factored into the price?
Of course fears over swathes of fresh capacity hitting the oil market, not to mention the issue of rising exploration and refining costs, has kept the lid on share prices across the oil sector for what now seems like an age.
But with BP dealing on a P/E readout of 10.2 for 2014 — just above the value watermark of 10 times prospective earnings — and 9.4 for 2015, it could be argued that prices now offer plenty of upside.
And should the global economic recovery pick up the pace, and geopolitical tensions in the Middle East and Ukraine cast concerns over possible supply disruptions, the fossil fuel giant could prove to be a goldmine for risk-tolerant investors.