BP Plc's (BP) ability to manage its capital expenditures and provide a solid dividend yield makes it an attractive investment.
"Overall I think BP remains a very interesting story," Berenberg analyst Henry Tarr told Real Money.
He explained that the company's near 6% dividend yield makes the company an attractive play for investors and protects to the downside should oil pull back again in the near future.
Tarr maintains a "Buy" rating on the stock, suggesting an almost 20% premium on the current share price for his long-term price target.
Cash Flow's a Positive
The company's ability to provide for a strong dividend and hefty buyback schedule also creates an attractive thesis for the company moving forward.
"While we didn't get the sense that accelerating total shareholders returns is a near-term focus, BP highlighted that its capital frame should prioritize dividend [and] buyback followed by de-leveraging," JP Morgan analyst Christyan Malek wrote in a research note. "BP highlighted its ability to realize significant capital efficiencies through technology which would act as a source of upside for cash return as BP remains committed to its $15-17 billion capex guidance to 2021."
Helping is the multi-billion dollar "wiggle room" that management has been able to generate despite a downturn in oil markets. The company's low break even basis along with its capital efficiency should also help the company fulfill its stated acquisitions without share dilution.
The company's strong balance sheet will allow it to finance its important $10.5 billion deal to acquire BHP, announced in July, without share dilution based on oil's strong 2018 into October.
"This simplifies the transaction removing the equity issuance and the related dilution and friction costs that would have arisen. In this case, proceeds from the additional $5 billion to $6 billion divestment program will be used to reduce debt given we would no longer be issuing equity," CFO Brian Gilvary said.
It is unclear if this arrangement has been affected at all by the recent decline in oil prices as BP did not return requests for comment.
"Our thesis suggests BP's long-term upstream growth pipeline has the sector's most attractive mix of capex headroom and returns, and we retain our belief that new barrels and a competitive CFFO/boe are key levers behind falling cash breakeven," Malek wrote.
He added that the synergies available through the company's BHP acquisition, which was signaled to be completed without an equity raise on the company's October earnings call, should continue to provide growth to sustain the aggressive yield and buyback strategies.
Malek set a "Buy" rating for the stock based on the company's room to grow and its longer term focus on driving shareholder value.
Moving Past the Penalties
Another longer term driver for BP's bottom line is the fact that the company may finally be moving toward a finish line on penalty payments from its checkered past.
There's also memories of the Deepwater Horizon spill, something that devastated the area around the disaster site and provoked serious penalty impositions from American lawmakers, totaling $20 billion.
However, that staggering figure has now been brought down to a manageable level.
"On Macondo, in terms of the liabilities, we are down to the final series of claims," BP CFO Dr. Brian Gilvary said on the company's October earnings call. "We're now in the sort of de minimis. And this is probably one of the quietest quarters that we've had around Macondo."
Shares of BP were higher in early afternoon trading.
Berenberg's Tarr picked up on this, noting that the typically noisy overhang should only get quieter from this point on.
"They are moving past the Macondo payments," Tarr told Real Money. "The payout this year will be in the range of $3 billion and will decrease to about $1 billion in 2020. In effect, their cash flow gets boosted by $2 billion as the payments roll off."
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