Why Steady Progress Makes This Oil Major a Buy

BP has endured a long journey back to health in the years since the 2010 Gulf of Mexico rig explosion and resulting oil spill. Ever since then, its investors have eagerly awaited any news from the company that may signal better days ahead for what was once one of the world's energy super-majors.

While recovery has been slow and the road to recovery isn't without its fair share of potholes and speed bumps, measurable progress has been made and continues steadily with each passing quarter. Its continued improvements and strong commitment to its shareholders make BP a great buy within the energy sector.

Progress, one barrel at a time
During the third quarter, BP's underlying oil and gas production rose 3.4% year over year excluding Russian operations. BP generated $6.3 billion in operating cash flow in the quarter, up nearly 2% from the same quarter one year ago.

Going forward, BP very much intends to get back to business. The company made two significant exploration discoveries during the last three months, in offshore Egypt and India. So far this year, BP has completed 12 exploration wells and another eight wells are currently being drilled. For the year, BP expects between 16 and 18 new exploration wells to be completed in 2013.

All eyes are now on BP's ongoing civil trial and the damages BP is likely to pay. To prepare for this, BP has already divested $38 billion in non-critical assets, and announced its intention to divest another $10 billion by the end of 2015 to protect itself against further damages. To date, BP has paid $42.5 billion in charges pertaining to the Gulf spill.

While there's no denying BP's tough turnaround efforts, it's not as if other European energy majors are out-performing right now. Royal Dutch Shell saw its own operating cash flow drop 6.7% year over year in the most recent quarter, after taking a $2.2 billion impairment charge related to what the company termed 'challenges' in its Nigeria operations.

However, Royal Dutch Shell's problems are widespread: It experienced a drop in second-quarter earnings in both its upstream and downstream operations. And, although BP is also experiencing downstream difficulties like its rivals due to unfavorable refining conditions, its upstream earnings remained flat year over year and increased on a quarter-over-quarter basis.

BP's strong commitment to shareholders
Along with its quarterly release, BP announced yet another dividend increase. This time, the company increased its distribution by 5.5% to an annualized $2.28 per share in the U.S. Going forward, BP intends to review the dividend after the first and third quarter earnings announcements. At current prices, BP's new dividend level provides a 5% yield.

Investors likely remember BP having to suspend its dividend after the 2010 spill, and then only reinstitute its distribution in 2011 at half the level pre-spill. At the same time, BP has now come through with three dividend increases since it resumed paying dividends in 2011. The distribution has a ways to go before it reaches the $3.36 per share level it held before the Gulf spill, but we should give credit where it is due, and in the case of BP's dividend, again we see that the trend is going in the right direction.

BP's extremely high dividend yield places it in rare company within the energy space. Particularly when compared to its U.S.-based peers, BP's dividend stands out. Energy juggernaut ExxonMobil yields just 2.8%, instead favoring share buybacks as a means to provide cash to shareholders. It's worth noting that ExxonMobil has a smoother track record of paying and raising annual dividends than BP. It hasn't had to cut its dividend like BP did, so investors may favor its relative stability. Indeed, according to the company, Exxon has raised its dividend by 6% compounded annually over the past 30 years.

Although investors are likely scared by the magnitude of damages BP has had to pay for the 2010 Gulf spill, the company is on the road to recovery. Its underlying operations are sound, and its balance sheet is strong. BP is firmly committed to providing real cash to shareholders, and it has prepared itself well to handle the legal liabilities from the Gulf spill. Its dividend yield stands among the highest in the integrated energy space, and its depressed stock price looks like a solid buying opportunity.

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The article Why Steady Progress Makes This Oil Major a Buy originally appeared on Fool.com.

Bob Ciura owns shares of BP p.l.c. (ADR). The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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