BP (LSE: BP) (NYSE: BP.US) has not had it easy in 2014. Russian sanctions have become more stringent, the Deepwater Horizon oil spill lawsuit isn’t favouring BP and worst of all, and Brent is down by about 25% year-to-date, which took a hit on the company’s bottom line during the third quarter.
All these events put together has ensured that BP share price has declined by about 9.6% year-to-date. This makes one ask: does this dip present a good entry point for an investment in BP?
For reasons discussed below, yes, the dip makes BP a good ‘buy’ candidate for me.
Delivering on promises
In 2011, the company said it would start working on a 10-point plan. For the most part, the company has been delivering on the promises in that 10-point plan. Here are a few that should interest dividend investors.
In the plan, the company highlighted its intention to grow operating cash flow by 50% by the end of 2014. You want to bear in mind that its operating cash flow at the end of 2011 was $22.2 billion. By the end of the third quarter, however, the company already has $25.5 billion in operating cash flow. And the company said it is confident of generating between $30 billion and $31 billion by the end of the year.
While that won’t exactly add up to a 50% increase, the progress so far is commendable. If for nothing else, the fact that the Deepwater Horizon lawsuit has taken a different direction since 2011 makes this commendable. Besides, considering that the company generated $7.9 billion and $9.8 billion in operating cash flow in the second and third quarter respectively, it is very likely that BP will actually meet up with the plan to ramp up operating cash flow by 50 percent.
Reduction of debts
It was also part of the 10-point plan to reduce the company’s gearing, or net debt ratio. In 2011, it said it aims to keep its gearing at the lower half of the 10-20% range over time. It would help to keep in mind that its gearing in 2007, 2008, 2009, 2010 and 2011 is 22.1%, 21.4%, 20.4%, 21.2% and 20.% respectively. So to say it aims to keep its gearing at the lower half of the 10-20% range is quite ambitious.
To management’s credit, though, the company’s gearing now stands at 15%, as of the end of the third quarter. There are two things to appreciate here. First, the reduction didn’t happen abruptly. The process was gradual between 2011 and now. This suggests that the company actually has a working plan for reducing its debts. And it further gives hope that the company will be able to keep gearing at the lower half of the 10-20% ratio. Second, that fact that the company is able to reduce this amidst servicing claims from the Deepwater Horizon disaster, which has cost the company about $42 billion so far, suggests that the company’s balance sheet is robust.
To keep the story short, the company has been delivering on the promises on the 10-point plan, for the most part. And shareholders are already seeing the rewards with the recent increase in dividends. One other metric that make BP a buy candidate is the fact that it currently trades below its net asset value. With that in mind, dividend yield could become higher than current levels in future.
But there is a downside
While the points above are encouraging, there is a risk that investors should be aware of. The company said in its third-quarter earnings call that “it is still not possible to reliably estimate the remaining liability for business economic loss claims”, regarding the Deepwater Horizon claims. And this is a genuine cause to worry given how the case constantly takes a fresh twist. Therefore, there are chances that the claim might end up affecting cash flow, a situation that could threaten dividends.
