For most shares in the FTSE100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.
That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.
To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:
- Prospects
- Risks
- Valuation
Today, I’m looking at oil giant BP (LSE: BP) (NYSE: BP.US).
Track record
With the shares at 490p, BP’s market cap. is £91,029 million.
This table summarises the firm’s recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue ($m) | 361,143 | 239,272 | 297,107 | 375,517 | 375,580 |
| Net cash from operations ($m) | 38,095 | 27,716 | 13,616 | 22,154 | 20,397 |
| Adjusted earnings per share (cents) | 112.59 | 88.49 | (19.81) | 135.93 | 60.86 |
| Dividend per share (cents) | 55.5 | 56 | 21 | 29 | 34 |
1. Prospects
If you ignore the rain cloud hanging over BP due to the firm’s 2010 Gulf-of-Mexico disaster the company looks in good shape and well-placed to deliver growth in 2014 and beyond.
2013 was a cracking year for upstream-exploration success, with the firm drilling 15 wildcat exploration wells and scoring a strike with seven of them. Those potentially commercial discoveries are in far-flung and wild places: India, Egypt, Angola, Brazil, and, the Gulf of Mexico. It must have taken the steel-reinforced courage of Red Adair himself to drill that last one!
The momentum looks set to continue with nine exploration wells currently operating, giving BP’s exploration activities a good start in 2014. It seems that BP’s strategy since the Gulf-of-Mexico disaster is starting to pay off. The firm re-focused and engaged in a policy of more active portfolio management, selling assets and seeking to target high-impact exploration opportunities to leverage its expertise. 2013’s deal in Russia seemed part of that plan, where BP collaborated with, and now owns a 19.75% stake of, Russian state-controlled oil and gas enterprise Rosneft.
Pushing into new frontiers is important to BP as it can develop wildcat success into production to fuel cash flow, which in turn can fuel investment for further growth and to support the firm’s progressive dividend policy.
2. Risks
The obvious risk to mention here is the possibility of another Macondo-well-style blow-out, or some other operational disaster occurring. We shouldn’t forget that BP’s activities are inherently dangerous.
We’ve seen how such events can stop the dividend payment and knock the share price. In fact, the drag from Macondo isn’t over yet as the US has yet to fully quantify its fines for BP, and the end of compensation claims seems as far away as ever.
3. Valuation
A forward dividend yield of 5.2% for 2015 is alluring. City analysts expect forward earnings to cover the payout just over twice.
The forward P/E multiple is running at about 8.8.
What now?
BP’s dividend looks attractive and on-going drilling success seems set to keep the cash flowing to support that dividend. However, there is still a lot of uncertainty hanging over the company with regard to costs in the US following the 2010 disaster there.
