As oil prices remain subdued, BP (LSE: BP) (NYSE: BP.US) and other major oil companies continue to suffer. There are several reasons why the shares of the British oil producer may bounce back, however.
BP is a long-term investment that could yield market-beating returns, in my view. It has changed a lot in the last 20 years, having acquired and divested assets worth billions of dollars. Between 2005 and mid-2010, its stock comfortably traded around 600p.
Enter the Deepwater Horizon disaster — 20 April 2010. BP shares have changed hands between 400p and 500p since then. Now, plunging oil prices and possible additional sanctions related to the oil spill in the Gulf of Mexico weigh on BP’s 448p stock price.
I reckon this is an opportunity for value investors.
BP in 1999 vs BP in 2014
The shares of BP reached 600p for the first time in mid-1999, 12 months after BP merged with Amoco Corp. In those years, the severe Asian crisis and the unexpected default of Russia dominated the headlines. Oil prices were about 75% lower than today.
In 1999, BP was a much smaller entity, with $100bn of revenue, including joint ventures. By comparison, BP is expected to turn over more than $350bn in 2014.
BP reported 1999 operating profit in the region of $8bn, and net income of $5bn, 77% of which was distributed to shareholders. Earnings per share and dividend per share came in at 25 cents and 20 cents, respectively.
In 2014, BP’s operating profit margin and net income margin will likely be 1.5 percentage points below 1999 levels. Net income is expected at $12.2bn, so earnings per share should come in at about 66 cents this year. Roughly 50% of net earnings will likely be distributed to shareholders.
Valuation Discount & M&A Stuff
Between 1995 and 1999, revenue and profits were volatile, just like they have been in recent years. The massive valuation premium of “1999 BP” against “2014 BP” — adjusted for different GBP/USD exchange rates and a lower number of shares outstanding — is not justified, in my view. That’s not to mention that BP is looking to shed underperforming assets in order to finance a multi-billon stock buyback.
Investors do not consider that BP and Exxon may shock the oil world with a jumbo deal, but a merger between these two oil behemoths is a distinct possibility. It would be structured as a takeover of BP by Exxon, of course. You should also consider that Shell is also an ideal partner for BP.
M&A talk in the oil world is coming back with a vengeance. Exxon needs production growth and has plenty of capital to deploy. Like most oil producers, it must generate higher returns to satisfy its shareholders. Options are few and far between, though.
If a takeover offer emerges, BP stock will be valued at 600p or more.
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.