Why I'm Still Backing BP

This article has been adapted from our sister site across the pond, Fool U.K.

I'm often surprised by the way investors seem to shun good companies that have suffered misfortunes in the past, while piling into fundamentally poor businesses whose rear-view mirror shows a sparkling but brief recent history.

To me, BP (NYS: BP) is a decent company with solid prospects that has been clearly undervalued for some time. But many investors haven't been interested, with the Gulf of Mexico effect on its long-term value having been exaggerated. True, I own some BP shares, so maybe I'm biased -- but I have so few it'll make little difference to me either way, and I'm not alone in my view.

BP's recovery continues
To me, today's third-quarter results from BP, which chief executive Bob Dudley described as a "definite turning point," underline the value to be had in the shares, as the company reported profits that were a little ahead of expectations.

Mr Dudley went on to say:

Our operations are regaining momentum and we are facing the future with great confidence. I believe we will build on our strengths to substantially grow operating cash flows, allowing us to directly increase returns to shareholders as well as invest for future growth.

Replacement-cost profit for the quarter (which excludes gains on oil and gas stocks) was slightly higher than expected at $5.1bn, though that was down 3% from the previous quarter. And for the nine months, BP reported a profit of $19.5bn -- against a loss of $9.5bn for the same period last year, when the company was hit by that $40bn charge for the Gulf of Mexico disaster.

Cash flow and investor returns
BP also announced that it will increase its disposal proceeds target from the current $30bn to $45bn, which should strengthen the balance sheet further and allow the group to focus on increasing returns to shareholders, in the form of both dividends and buybacks.

On current analysts' forecasts, the 454p share price offers a dividend yield of 3.7% for the end of this year, rising to 4.3% for 2012. But after today's statement, it sounds like we should be expecting to see dividends improve further, and estimates for future payouts are likely to be upgraded.

BP also told us that 2011 was its best upstream year of the past decade, with significant increased production coming online. Plans are apparently now in place to double exploration, though there was no timescale given for that.

BP's strategic refocus and divestment programme, coupled with upstream and downstream projects coming online, and closing the book on disaster cleanup costs, is expected to boost cash flow significantly -- the current forecast is for a 50% increase by 2014, assuming oil trades at $100 a barrel in 2014.

Is this really a turning point?
When I look at all of this, what I see looks more and more like a set of figures from an everyday "business as usual" oil company, doing what oil companies do.

And that's the key point. The door is closing on the financial impact of the Deepwater Horizon explosion and its aftermath, and rather than seeing BP as a disaster-management exercise with oil production on the side to cover the costs, we can surely now get back to normal and see the company for what it is.

Investor psychology does often exaggerate the ups and downs of the market, and most people do like to follow the crowd -- see booms and busts passim. And that crowd motivation does so often turn to madness, overvaluing things going up and undervaluing things going down.

It can take a lot to get people to return to investments that have bitten them before, and many will abandon a share for life once they have taken an unexpected loss on it.

Back in favor?
But will these results start to turn the psychology back in BP's favor?

To my mind, BP is simply a good long-term investment, and it has been for some time, offering decent dividends on a modest share price. And with today's rise bringing the shares to a forward P/E of just over 6, you surely can't disagree with me holding the shares, can you?

If you do, or even if you don't, please share your thoughts below.

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More from Alan Oscroft:

Alan owns shares in BP.

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