BP (NYSE:BP) A Safe Dividend Play with Near-Term Catalyst

BP (NYSE:BP) has been one of the more interesting investment options over the past several years. The highly publicized Deepwater incident pummeled the stock immediately. People freaked out. The stock went as low as $27/share in June of 2010, then recovered back to $49/share by January of 2011. Since that time, the stock has gone sideways after adjusting for dividends.

Faltering oil prices, lawsuits and compensation claims tied to Deepwater, a messy TNK-BP breakup, and subsequent partnership with Rosneft’s predatory Igor Sechin has only served to depress the stock further. We can speculate about the intangibles of the legal process and the trustworthiness of Igor Sechin, but from a numbers and timeline perspective, BP looks attractive at its current levels of operation. In spite of diversions of cash to legal costs, and a lower dividend from Rosneft than TNK-BP provided, BP continues to generate large free cash flows.

BP’s margins are still sub-par compared to the other majors, though improving. Management has recognized this fact in the annual statement. Nobody is getting a free lunch in the executive lounge.

Margins

 

Kind of amusing that they think they possess any goodwill at all. Thankfully it represents a very small portion of total assets compared to most companies.
Kind of amusing. Thankfully it represents a very small portion of total assets compared to most companies.

What is impacting the stock?

1. Litigation regarding the Deepwater Horizon.
2. A flood of natural gas and oil from the U.S., which is helping to moderate oil prices.
3. Rosneft ties.

Catalysts

  1. Resolution of law suits. BP has been running adds in the Wall Street Journal recently claiming that it has fulfilled its legal obligations for the Gulf oil spill. Frankly, having been there, the Gulf seems like it is doing OK. It’s likely that BP will succeed in its efforts to wrap up litigation for the Deepwater Horizon spill within the next year or two barring some sort of unforeseen environmental impact.
  2. Rosneft made its first payment recently. Rosneft dividends will represent a great long-term deal for BP if they continue but we should not count on that.
  3. Stock buybacks announced this year to the tune of $8 Billion dollars worth.
  4. 5% dividend, more than many bonds pay now.
  5. The first round of stock options for executives post-Deepwater will vest in 2014.
  6. Inflation.

I think the strongest catalyst, the true driver for catalysts 1, 3, and 4, are the stock options. Never underestimate the self-interest factor. Unless they can coax the stock prices to a reasonable level a large portion of BP’s long-term executive salaries will be worth less now than four years ago. Resolving the legal obligations would provide even more cash to spend on stock buybacks and dividends.

Use of Cash

While BP’s future largely rests upon high demand for oil, valuations for the company are well-below the other major oil producers. Further, oil represents an excellent inflation hedge. As the Fed unwinds QE, inflation is a danger.

This is why I am going long BP for under $42/share. Approximately 10% of my total portfolio is currently invested in the U.S. ADR shares. The potential short-term catalysts at an incredible price is simply too appealing for me to pass up.

The underlined data points were particularly interesting to me
The underlined data points were particularly interesting to me

I intend to hold the stock until a legal resolution is reached, at which point I will re-evaluate the performance of management regarding net margins and shareholder returns. I estimate this will take 1-3 more years to play out completely but will be very happy to receive the dividend in the meantime. The stock has no room to go lower. All the bad news is priced in. Mr. Market has not factored in the catalysts.

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Author: secondhandstocks

The genesis for this blog stems from a Marine buddy and I came back from Afghanistan with more money than knowledge, and heedlessly tossed our hats into the stock market ring. A few months later, I remember discovering the classic book The Intelligent Investor by Graham and Dodd, and ravenously devouring my first introduction to value investing. That framework - with some generous additions by Seth Klarman, and Joel Greenblatt among others - guides my investment philosophy. I spent five years working in the intelligence field, both in the Marine Corps and then for a government agency after that. I speak Arabic and Pashto, have programming and analysis experience, and enjoy investing in technology companies as a hobby. I also spent a year on Wall Street working on a #1 Ranked Institutional Investor team, before deciding that that the Sell-Side was not for me.

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