BP (LSE: BP) was finally able to draw a line under the Deepwater Horizon oil spill earlier this month. And now investors have a final figure on liabilities stemming from the spill, to me BP once again looks like an excellent investment opportunity.
Selling assets
To pay for the liabilities that arose from the Gulf of Mexico disaster, BP has been forced to sell some of its least attractive assets. In some respects, this was a stroke of good luck for BP. By the time the price of oil began to collapse last year, BP had already sold the majority of the assets it was planning to divest.
As a result, BP was able to get top dollar for these unattractive assets, something that wouldn’t have been possible in the current environment.
Now BP has pruned its portfolio of the assets it no longer wants, it is well positioned to ride out the oil price slump. Many of the BP’s peers are not in the same position, and they’re now struggling to sell off underperforming assets. It’s a buyer market as the price of oil trades at a five-year lows and shows no sign of recovering any time soon.
Positioned for a recovery
With its portfolio of high-quality assets and a number of new projects under development, BP is well placed to stage a recovery going forward. Even without a significant recovery in the price of oil, BP can continue to grow.
Indeed, along with its own cost-cutting measures, BP will also benefit from wider sector cost pressures. Most oil companies are now demanding that contractors cut their costs to help balance budgets, pushing down costs across the industry. BP will benefit as the company already has one of the best asset portfolios around. With costs falling across the industry, the company should be able to generate higher profit margins that its peers going forward.
Further, the company has cut capital spending to $20bn this year, down from $26bn as originally planned. Also, asset sales are still taking place. During the first half, BP agreed to sell $7.4bn of assets under its $10bn divestment programme.
Back to 500p?
BP will benefit from lower costs, but ultimately, the company’s fortunes depend on the price of oil.
However, over the past few months there’s been plenty of speculation that BP could become a bid target now there’s a cap on the company’s Gulf of Mexico liabilities.
City analysts have estimated that a bid of around 500p would be enough to convince BP to sell; that’s a gain of 29.5% from current levels.
Even if no bid materialises, if BP can prove to the market that its 6.7% dividend yield is here to stay, the company’s shares will win favour with income investors, who will keep buying until the yield returns to a more normal level of around 5%. BP’s shares would have to hit 520p before the yield reached this level. Add on a year’s worth of dividend payments, roughly 26p per share, and over 12 months BP’s shares have the potential to return just under 42%.
