BP, The Comeback Kid

Back in 2010 BP plc (BP) along with Transocean (RIG), and Halliburton (HAL) all played a large part in the Deep Water Horizon explosion that resulted in the largest oil spill in U.S. history. An estimated 210 million gallons of oil spilled into the Gulf of Mexico, until the well was finally capped 87 days later. Aside from the environmental impact (which is mixed depending on what you read), the overall financial costs associated with the clean-up, state/federal fees, and the ongoing litigation costs have kept a very dark cloud over BP as a company and its stock.

During and after the oil spill the BP stock was cut in half with majority of the blame for the spill being directed solely at BP. The stocks rapid decent and the media's unrelenting negativity toward the company had many wondering if the company would have to file for bankruptcy or sell off so many of its divisions to pay for the spill that the company would cease to be what it was.

Flash forward three years and we can see that BP did not go bankrupt, the company did not need to break up to pay its bills, and surprisingly enough the media found someone/something new to dwell on. Never the less, the stock for the past three years has really struggled compared to its peer group, see detailed performance chart below. Part of that stagnation has been the result of investors not knowing what the total cost to BP ultimately would end up being. Additionally, since there was so much negativity and public outcry surrounding the stock and company a lot of mutual funds dumped the stock and never picked it back up.

Below is a chart comparing BP against several of its major rivals.

STOCK	PRICE	PEG	Price to Book	ROE	Yield
BP	$45.50	3.82	1.11	19.82%	4.90%
Exxon Mobil (XOM)	$96.75	5.56	2.51	20.19%	2.60%
Chevron (CVX)	$118.75	1.53	1.60	17.07%	3.20%
Conoco Phillips (COP)	$69.05	3.04	1.67	16.84%	3.70%
Total (TOT)	$57.50	4.29	1.39	12.75%	4.60%
Royal Dutch Shell (RDS.A)	$67.50		1.18	11.67%	4.70%
Statoil (STO)	$23.00	-3.38	1.22	11.57%	3.80%

Even more encouraging, two weeks ago a federal judge temporarily blocked all additional payments to Gulf businesses on the stance that these businesses could not sufficiently substantiate the direct impact or loss to their business as a result of the spill. This news if finalized could end up saving BP hundreds of millions (if not billions) of dollars.

After the spill in 2010 BP established a trust fund in the amount of $20 billion to help pay for settlements, fees, and clean-up. At the end of 2013 Q3 BP had paid out a total of $19.7 billion, leaving a total of $300 million left. After the remaining $300 million is depleted, all remaining charges will need to come out of BP profits. Given, last week's news and the fact that majority of the penalties and fees have already been paid. I think it is reasonable to think that a final settlement will be agreed upon and that will be it. Allowing BP to finally put the Gulf spill behind it and get back to delivering value to shareholders.

Fundamentally, BP trades at a deep discount compared to its peer group. The stock currently trades for only 10 times 2013 earnings estimates and 8 times next year's estimates. The company has no long term debt. It has a gross profit margin of 12.3% and $56.6 billion in long and short term investments/cash. In March, BP authorized an $8 billion stock buy-back program to offset the investment in TNK-BP. Additionally, given the fact that BP might be on the cusp of finalizing a final settlement for the 2010 disaster, the stock is greatly undervalued.

Aside from the fact that I feel BP is very much undervalued compared to its peers at these levels, I also like the forward trajectory that the company is headed in. During the company's Q3 investor conference BP shared the vision of where the company is headed and focused for the next five years. Below I have highlighted some of the key take aways from the investor presentation, which can be found here:

· BP's exploration inventory has been completely reloaded with positive momentum in drilling with main success being highlighted in 2013

o 10 wells have been completed YTD, with 3 discoveries thus far

o Expecting to complete 16 -18 wells by year end

· BP continues to maintain a high degree of discipline in their drilling capital spending - Thus far the firm has continued to stay within its budget of $3-$3.5B

· Investments in unconvetionals continues to drive business at BP, now making up 40% of its portfolio

o Canada's SAGD as well as shale and tight gas opportunities in the US

o 70,000 barrel per day shale production business that continues to grow

Given BP's high exposure to shale, continued focus on investor return, and attention to capital discipline I am very optimistic on the future and overall outlook of BP. I think that any type of weakness in the stock pushing it back toward the $41 - $43 per share level, the stock should be purchased and held onto. I think next year it would not be unreasonable to see the stock back up in the $50 range. A price point that BP shareholder have not seen since April of 2010.

Source: BP, The Comeback Kid

Disclosure: I am long RIG, BP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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