BP: High Yield in Big Energy

08/04/2016 10:00 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

With the worst apparently over for oil and natural gas prices, we believe that this British energy giant is worth buying, explains Ian Wyatt, income expert and editor of High Yield Wealth.

BP PLC (BP) has seen its shares rise some 19% over the past three months. Still, the stock yields 6.6%, which is among the highest yields available from big energy.

BP has defied the detractors and maintained its quarterly dividend. With oil price and natural gas prices well off their 2016 lows, BP is all but assured of maintaining its dividend. 

What’s more, the worst is behind BP regarding the 2010 Gulf of Mexico oil spill. Most of the costs associated with the Gulf spill and the tragedy associated with have been settled.

Earlier this year, a U.S. District Court approved BP's $20 billion settlement with the government and the Gulf states. The settlement will be paid in $1.1 billion annual installments over the next 18 years. 

On the operations side, BP is performing. It reported first-quarter 2016 operating cash flow of $3 billion, an improvement over the $2.5 billion operating cash flow from the year-ago quarter. The improvement comes despite weaker oil prices. With oil prices on the rise, we expect operating cash flow to rise as well.

BP’s focus to improve operating efficiency in the downstream segment — marketing and refining -– will lead to cost savings of $2.5 billion by the end of 2017. Operating margins should expand.

BP has also stepped up its focus on liquefied natural gas; it recently decided to invest an additional $8 million to expand its Tangguh LNG project in Indonesia. We think that BP will realize a high return on its investment.

Higher LNG demand will be driven by increased demand in China and India, where further urbanization will lead to an increase in electricity requirements and higher LNG consumption.

IAs the demand for LNG in both China and India rises, a supply gap will start opening up in the LNG market. BP’s presence in Southeast Asia ensures it is as well placed as any energy company to fill the gap.  

If oil prices continue to hold above $40/barrel and natural gas prices above $2.50 per mmBTU, we expect to see significant improvement in BP’s earnings and cash flow.

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By Ian Wyatt, Editor of High Yield Wealth

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