Why One Analyst Now Sees Great Value in BP

Over five years ago a huge disaster happened that would change the world for BP PLC (NYSE: BP), millions of barrels of crude oil were dumped in the Gulf of Mexico. Finally, the company has come to terms with it and set up a financial plan to pay for the charges. At this time, analysts began to speculate on where this oil-and-gas giant would go from here.

Argus raised its rating on BP to Buy and set a price target at $42, based on three factors. First of all, BP announced in early July that it would settle all outstanding claims related to the 2010 Deepwater Horizon oil spill; the $18.7 billion settlement will be paid out over an 18-year period, and eliminates a worst-case scenario. Second, Argus believes that management is committed to maintaining the current annualized dividend of $2.40, which yields about 6.4% — above the average of 5.6% for other “supermajors” in the firm’s coverage group. Finally, it believes that BP’s cost-cutting and restructuring efforts are helping to offset the impact of lower oil prices and positioning the company for higher earnings as prices recover.

The independent research firm views the $18.7 billion settlement as a positive for BP as it reduces uncertainty about the ultimate financial impact of the spill. Argus also believes that the pretax nature of most of the penalty and the extended 18-year payout schedule will limit the impact on BP’s cash flow and balance sheet.

ALSO READ: 6 Oil & Gas Stocks Analysts Want You To Buy

In October 2013, BP announced plans to divest $10 billion in assets before the end of 2015, and has thus far divested $7.4 billion of this amount. It has also divested roughly $45 billion in assets since the oil spill in 2010. These divestitures have made BP a smaller, higher-returning company, a change from its previous focus on growing production at all costs. Ultimately this also lowered the risk profile of its asset base.

Management believes that the company’s robust balance sheet and strong cash position, including cash from divestitures, provides flexibility during a period of lower oil prices. On the second quarter conference call, management said that BP remained on track to divest $10 billion in assets by the end of the year.

As a result the firm lowered its 2015 earnings per share (EPS) estimate to $2.44 from $2.46 to reflect the slight second quarter earnings miss relative to expectations. Argus believes that BP’s upstream segment will post weaker year-over-year results in 2015, but that it will also benefit from management’s efforts to lower costs. We expect continued solid results in the downstream business as margins remain strong. Its 2016 EPS estimate is $2.82. Consensus EPS estimates for the 2015 and 2016 years are $2.43 and $2.71 respectively.

Argus estimates that the dividend will remain at $2.40 for both 2015 and 2016. Management is committed to paying the dividend, and that the company will be able to cover the dividend, if necessary, through additional asset sales or debt issuance, according to the firm.

ALSO READ: 7 Big Banks Trading Under Book Value

Shares of BP were up 0.5% at $37.56 on Thursday, a day where crude oil was down slightly. The stock has a consensus analyst price target of $41.00 and a 52-week trading range of $34.88 to $49.49.