BP Looks Like a Buy

The headlines tell us that FTSE 100 (INDEX: ^FTSE) giant BP (NYS: BP) had a rubbish first quarter.

The big oil company said its replacement-cost profit (a figure that ignores gains or losses from non-operating items) dropped to $4.8 billion, compared with $5.5 billion for the first quarter of 2011. This was below expectations.

The shares have reacted accordingly, slumping more than 3% to 430 pence at the time of writing. The big picture shows the company producing less oil and gas than it did last year after selling fields to help pay for the 2010 Gulf of Mexico disaster. So BP was unable to benefit from higher average oil prices or to produce as good a first-quarter report card as did its peerRoyal Dutch Shell (NYS: RDS.B) last week. Shell was able to report an 11% increase in first-quarter profits to $7.7 billion as it took advantage of higher prices.

But there was some good news among BP's first-quarter performance. The company has now paid $16.6 billion into a trust fund and expects to meet its target of $20 billion a year earlier than anticipated. Operating cash flow was up on the previous year, too. Also, the company's continuing divestment program now totals $23 billion. It now plans to sell its smaller fields in the Gulf of Mexico as it focuses on larger opportunities there.

CEO Bob Dudley says BP has gained access to significant new deepwater and U.S. shale exploration and has five deepwater rigs at work in the Gulf of Mexico.

BP still has it all
In early February, I was of the view that BP had it all. Since then I've been proven wrong as far as the share-price movement is concerned; it stood at 484 pence when I made that call. But I haven't changed my view that current short-term price weakness presents an excellent long-term opportunity.

A company the size of BP is analyzed to the nth degree, so you can't really beat the market other than by zooming out and looking at the big picture and fundamentals, in my view. And on this score, I still think BP has it all. When the Gulf disaster is a distant memory, so too will be today's anticipated price-to-earnings ratio of less than six and yield of 5.7%. That's because the price, I believe, will have risen to a level more commensurate with earnings, and the yield will gradually increase closer to historic levels.

For the moment, the yield remains at $0.0825. BP is a U.S. dollar-based business, so when sterling strengthens, you get less income in the U.K.

But the Deepwater Horizon disaster still hangs over the company. BP has paid a total of $8.3 billion in claims and other payments relating to the incident. And the total expected charge for the spill remains at $37.2 billion. But this is an estimate, and while BP hasn't admitted liability, it still faces claims from the U.S. and state governments and drilling companies.

The other concern is BP's 50-50 Russian joint venture. TNK-BP generates more than 25% of production, but the company doesn't have the direct control we shareholders would prefer to see.

Despite these concerns, it's all more than in the price for me. The huge cash outflows from the Macondo disaster won't last forever. We may even find that the company's eventual payout is lower than expected. Either way, BP's healthy cash flow should see it through while paying (and increasing) dividends along the way.

And once the litigation issues are finally put to bed, the shares will gradually respond accordingly. If BP isn't a good long-term value at today's price, I don't know what is.

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At the time thisarticle was published David owns shares in BP. The Motley Fool has adisclosure policy.
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