Bp easy money has been made – bp p.l.c. (nyse bp) seeking alpha electricity usage calculator


BP ( BP) has been a favorite oil and gas pick of mine for a while. I’ve recommended BP at as low as $34 per share back in August of last year. Looking back, it really seemed like a no-brainer: Shares yielded 7% and nobody wanted it. BP swore that it would break even with cash flow with Brent Crude as low as $50. Today the picture is very different. Brent Crude is near $80, and shares of BP have climbed and climbed.

This is a very long-term chart of BP. As you can see, shares are now at levels not seen since mid-2014, back when crude was up at over $100 per barrel. That is a big difference, and shares have since come quite a long way. Since the August article, shares have gone from $34.16 to $47.40; a 38% gain. Shares now yield just north of 5%.

The easy money in BP has been made. BP does have a three-year plan to improve cash flow and grow production in the most profitable of its assets, and this should improve cash flow in the years ahead. However, I believe that BP is now close to fairly valued. The big gains have already been made. This article takes a look at BP’s ongoing improvement plan and its current projects, as well as another look at the company’s valuation. Margin improvement

BP’s plan is to improve cash flow by investing in high-margin projects from its big asset portfolio. By 2021, BP expects significantly higher free cash flow by 2021, assuming a rather conservative estimate of between $50 and $55 Brent Crude. I am confident in BP’s plan to achieve this, particularly because BP continues to invest substantially in offshore drilling, where costs should be held in check by a big inventory of ‘stacked’ drillships waiting to be utilized.

BP’s projects are heavily weighted toward international, integrated gas and offshore drilling, particularly in the Gulf of Mexico and North Sea. In the last quarter, BP added another three projects to its long-term backlog: The Shah Deniz expansion in Azerbaijan, the Taas field development in Siberia, the opening of Atoll Field in Egypt, Constellation II in the Gulf of Mexico, and Clair Ridge phase II in the North Sea off the shores of Scotland.

This is a solid plan which, at the same time, maintains pretty tight capital discipline. With Brent Crude closing in on $80, BP could have approved many other projects, and they would have been quite profitable. Instead, BP, and most other international oil giants, have learned their lesson from 2014 and are instead opting not to get over their skis.

It is also for this reason that I am fairly confident that Brent Crude prices will not tumble. Production capacity is growing mostly in the US, but export capacity from the US will be limited. Offshore, the supermajors are increasing spending, but only in a small, measured way. Therefore, I believe supply will continue to be constrained. For BP, that is a good sign. Valuation

My change in sentiment on BP is mostly from a risk-reward perspective. I still like the fundamentals of this company, and its big offshore exposure makes it perhaps my favorite of the supermajors. However, BP has run up a lot. Last quarter, cash flow paid off capital expenditure and dividends, but it was still pretty close and that was with realized prices of $67 per barrel.

I like BP’s long-term plan, but that’s all that it is; a plan. We really don’t know where crude oil prices are going to be in three years. What we do know is that this is a big, integrated oil company that right now is paying out nearly all of its organic cash flow to dividends and capital expenditure. I expect there to be more financial flexibility in the years ahead, but I can’t say that for certain. In the meantime, the yield has slipped from 7% to 5% as shares have appreciated, and the stock is now at highs not seen in four years.

BP is ‘showing discipline’ by sticking to its original plan despite considerably higher crude prices. Still, it’s tough to know where oil prices will go, and shares of BP are at levels not seen since 2014. If you have a large position in BP, you may even want to do some re-balancing.

However, I write about this company when time permits, and that often means I am not able to do so regularly. I write about topics at much more regular intervals in my Marketplace service, Streaming Income. In that service I write about broader themes and provide multiple actionable ideas for income investors, with all articles and updates on a strict monthly or quarterly schedule, kept at a reasonable price geared for everyday income investors. I invite you to take a risk-free look.