Wednesday 21 February 2018

In spite of oil rates surge, British Petroleum stock is still undervalued

Pat Boyle

ONE consequence of the recent market turmoil is the huge drop in share values.

Shares in the big banks and construction related stocks have been worst hit, with only a few sectors left untouched.

One of those you would expect to be least affected is the energy sector and certainly some companies, notably explorers like Tullow Oil, have done extremely well. BP, on the other hand, looks like a classic case of a share being undervalued by the market.

Despite the huge run up in oil prices to record levels, the share is still trading with a forward dividend yield of more than 5pc.

The logical strategy in the current market is to take a share like BP and use it as a hedge against high oil prices. As long as crude is selling at anything like its current price, BP will keep churning out huge profits, with little prospect of a decline in the dividend payout. It will allso keep investing -- BP invested $14.8bn (€9.5bn) in projects and acquisitions in the first half and reiterated a forecast to spend as much as $22bn (€14.15bn) in capital spending, excluding acquisitions, this year.

Granted there may be some problems, including its ongoing spat with the Russians, a spat which has caused the share price to dip in recent weeks. BP is locked in a dispute with the billionaire co-owners in TNK-BP who have demanded Dudley's dismissal for treating the venture as a subsidiary of the UK oil giant.

Robert Dudley, who heads up BP's Russian venture, fled the country last week because of "sustained harassment" from a group of TNK-BP shareholders who accused him of mismanagement. Dudley has said he has no plans to step down and will continue running the company from abroad.

The importance of the Russian project cannot of course be underestimated -- the company has pinned a lot of hope on the venture, believing that it will deliver the huge reserves needed to compensate for declining assets in the North Sea and North America.

The company said this week that it's "not possible to predict the outcome if these matters remain unresolved." BP will defend its rights while seeking a solution acceptable to all shareholders, the group chief executive assured them.

In second quarter results announced this week income advanced 28pc to $9.47bn (€6.1bn) or $.049 (€.031) a share while it struck the quarterly dividend at $0.14 (€0.09) a share, up from $0.10825 (€0.06965) last year. It is also useful to remember that the company bought back $1bn (€643.3m) of its own shares in the quarter, a sure sign that the stock is undervalued.

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