BP plc (BP) was bumped higher on Monday, bouncing back from a double digit decline amid oil's recent bear market.
Shares of the British oil giant rose 2.13% on Monday, closing the day's trading at $41.19 per share.
"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, especially as the market for oil improves.
Macro Picture is Brightening
A major factor in accelerating oil out of its recent plunge into bear territory was the thawing of Sino-American relations over the weekend.
A degree of trade war fears have been put on hold thanks to a trade truce announced between the United States and China as the G-20 summit wrapped up. That truce will carry into 2019, according to President Trump's Twitter (TWTR) megaphone.
The bullishness on trade and oil prices was only increased by indications that OPEC will agree to reduce production at their Dec. 6 meeting in Vienna as a way to buoy prices after a plunge to about half of their October highs.
Even non-OPEC members, or perhaps "unofficial" OPEC members, have said productions cuts should be expected.
"Regarding oil prices and our agreements. Yes, we have an agreement to extend the deal," Russian President Vladimir Putin told reporters Saturday in Argentina. "No final agreement has been reached on output, but we will work on this together with Saudi Arabia."
The talk from Russia is positive given BP's 19.75% stake in Russian state-controlled oil producer Rosneft, which holds Russian Minister of Energy Alexander Novak as a board member.
"We want to coordinate approaches before the JMMC meeting in Vienna," Novak told Russian state news agency TASS, noting that a firm decision will be announced by Wednesday.
To be sure, there is concern over the situation of the official state of OPEC given the departure of Qatar from its ranks.
"The withdrawal decision reflects Qatar's desire to focus its efforts on plans to develop and increase its natural gas production from 77 million tons per year to 110 million tons in the coming years," Saad Sherida Al-Kaabi, the Qatari minister of state for energy affairs, said in a translated tweet. "Achieving our ambitious growth strategy will undoubtedly require focused efforts, commitment and dedication to maintain and strengthen Qatar's position as the leading natural gas producer."
However, analysts and TheStreet's Jim Cramer were quick to point out that the country is far more of an LNG player than an oil player. Thus, the decision should have little impact on oil companies like BP.
If the factors had not turned out as rosily as they have, Jim Cramer's AAP team declared that BP would still be the safest ways to play the oil industry even amidst a pullback.
"BP remains our favorite way to play the energy sector as we believe it is seeing strong support, despite the decline in crude prices thanks to its robust dividend yield, which now hovers over 6%," the Action Alerts Plus team wrote on Friday. "We view the payout as safe given the strong free cash flows and positive signaling from management which came in the form of the first dividend increase in years."
Management's ability to keep the break-even point at an industry low while also returning capital to shareholders is a key factor in analysts' minds as well.
"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."
He noted that the company's ability to manage its capital expenditure and keep its base cost for oil production is a key driver of his investment thesis.
"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 retained his "Buy" rating for the stock based on the company's higher floor compared to its peers given its stated $40 per barrel break-even point.
Turning the Page on Penalty Payments
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."
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."
Tarr, conforming with the analyst consensus, set a "Buy" rating for the stock with a significant premium still available for investors looking for opportunities in oil.
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