Is BP plc An Annuity Alternative?

The rollercoaster ride experienced by BP (LSE: BP) (NYSE: BP.US) investors over the last four years doesn’t make it an obvious choice for a retirement investment. Yet if nothing else, the Gulf of Mexico oil spill highlighted the immense strength of BP’s balance sheet, and its incredible ability to generate positive cash flow.

BPAfter all, BP has spent $42.7bn on dealing with the aftermath of the oil spill so far — yet it has reported a profit every year since 2011, restarted dividend payments in 2011, and generated operating cash flow of $21.1bn in 2013 alone.

I believe BP should be considered as a potential retirement investment, and could benefit from this year’s Budget pension changes. Legal & General estimates the end of compulsory annuities could lead to £6bn per year being withdrawn from the annuity market, and I expect much of this will be invested in dividend-paying stocks.

Here are three reasons to look again at BP:

1. Putting shareholders first

BP’s current $8bn share buyback programme is intended to shrink the company, so that it can maintain a decent dividend to shareholders without having to seek out ever-larger growth projects.

I think this is wise, and the firm’s current 5.1% prospective yield provides a good entry point for income investors.

2. Russian exposure

BP currently owns 20% of the world’s largest oil producer, Rosneft. The firm’s previous Russian joint venture, TNK-BP, resulted in a $12.5bn profit and I believe that in the long run, BP’s stake in Rosneft will prove highly valuable.

Russian assets are discounted even more than usual at the moment, due to the unrest in Ukraine, but I don’t think this will be a long-term problem. Russia needs to be able to sell its oil and gas at open market prices — and we need to buy it.

3. Upside potential

Later this year, we should find out whether BP has been found guilty of gross negligence for the Macondo spill, and will learn the size of the fine it will have to pay under the US Clean Water Act.

I don’t expect a gross negligence verdict, but even if I’m wrong and BP faces a $20bn+ fine, I believe the impact on investors will be fairly short-term. After all, BP has already targeted $10bn of disposals in the next year, and had $22bn of cash on hand at the end of 2013. Quite simply, BP can pay.

Buy BP?

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Roland does not own shares in any of the companies mentioned in this article.