FTSE 100 group BP (LSE: BP) recently announced its first dividend increase since 2014, having maintained its payout through the recent oil market crash.
Today I’m going to take a fresh look at this big-cap income stock and consider a possible alternative from the FTSE 250.
In the early stages of the oil market downturn, BP chief executive Bob Dudley correctly forecast that the price of oil would stay “lower for longer”. This stance has led to a five-year programme of change that’s designed to allow the company to break even at $35-$40 per barrel by 2021.
So far Mr Dudley’s judgement calls have delivered good results for shareholders. He’s managed the resolution of the Gulf of Mexico disaster and navigated through the oil market crash without cutting the dividend.
The group’s underlying replacement cost profit — an industry measure — rose by 139% to $6.2bn last year. BP is now starting to ramp up investment in new projects.
The biggest of these is the recent $10.5bn acquisition of BHP Billiton‘s US onshore oil and gas business. This will add 190,000 barrels of oil equivalent per day to BP’s production, plus 4.6bn barrels of discovered resources.
This bold deal suggests to me that Mr Dudley is now confident of several years of stable oil prices.
A turning point?
The oil sector appears to be at the start of a growth phase, and BP’s adjusted earnings are expected to rise by 79% to $0.56 per share this year.
This puts the shares on a forecast P/E of 12.5 with an expected dividend yield of 5.6%. Although net debt of $39bn is a little higher than I’d like to see, cash generation is improving rapidly. I can’t see debt becoming a problem for the foreseeable future.
Mr Dudley’s confidence may well be justified. For investors wanting a reliable high-yield stock, I’d rate BP a buy at current levels.
An interesting alternative
As oil producers start to expand again, companies offering petroleum engineering services are also starting to enjoy stronger market conditions.
FTSE 250 firm John Wood Group (LSE: WG) said today that it’s now “seeing recovery” in the oil and gas market. This engineering firm was previously a pure play on the oil and gas sector. But last year’s acquisition of Amec Foster Wheeler means it now offers a wider range of services.
In half-year results published Tuesday, Wood said sales for the combined group rose by 13.4% to $5,382m during the first half. Underlying operating profit rose from $72m to $125m, and the interim dividend was increased by 2% to 11.3 cents per share.
The right time to buy?
Integrating Amec Foster Wheeler is a big job. But in my view Wood benefits from strong management and good financial controls. Although net debt looks high at $1.6bn, that’s only slightly more than four times forecast net profit for the current year.
I can live with that, especially as reducing leverage to a more conservative level remains “a key priority” for chief executive Robin Watson. Debt reduction should be made easier by $200m of planned asset disposals and a three-year plan to cut $210m from the combined group’s annual costs.
Mr Watson is confident of “a stronger second half”. With the stock trading on 14.6 times forecast earnings and offering a 4% dividend yield, I rate it as a buy at current levels.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.