Once a bastion of US oil production, the frozen tundra of Alaska has become more of a political and environmental concern in recent decades, with total oil production from the region estimated at 500,000 barrels per day (bpd), down from 2m bpd in 1988. Perhaps then, it comes as no surprise that BP (LSE: BP) has joined a long list of oil majors leaving the region.
The British petroleum giant today announced it would be selling its Alaskan business – including exploration, pipeline and production – to Houston-based operator Hilcorp, for $5.6bn. Though the money will help strengthen the company’s balance sheet, it comes as part of a broader strategy that will have a longer-term impact on its stock.
Focusing on shale
The sale comes as part of a larger plan by BP to reshape its US portfolio in the wake of last year’s purchase of BHP’s US shale operations. BP said it will be selling $10bn of assets globally over the next two years to help pay for the acquisition.
Importantly for investors, according to CFO Brian Gilvary, these sales will not just reduce the company’s debt and strengthen the balance sheet, but will see excess cash distributed to shareholders via increased dividends and share buybacks.
Opportunity knocks
Interestingly, despite offering potential investors a lot of things to make it tempting, BP has in fact seen its share price decline almost 15% since its recent peak in April. This came predominantly on the back of weaker than expected Q1 results. However, when better than expected Q2 results were announced recently, the share price failed to see an equivalent boost.
Looking at BP’s fundamentals, I think the shares may now be worth buying. Its latest dividend announcement means the stock currently yields almost 7% on an annual gross basis. Though this level would be a red flag for a smaller company, for an established blue-chip like BP, I think it is a bargain.
In fact, I agree with my colleague Harvey Jones, that with the Federal Reserve and other central banks cutting, or considering cutting interest rates, this kind of yield for a solid firm like BP makes it a perfect addition to an income portfolio or ISA.
What’s more, even from a growth standpoint, the stock looks cheap. With this latest share price decline, the stock currently has a forward-looking P/E ratio of about 11. Meanwhile, its latest earnings numbers also seem to indicate strong prospects.
In Q2, the company was able to offset lower oil prices – the bane of all oil companies – through increased production, in turn helping to bolster cash flow and offer shareholders hope of decent payouts this year. At the same time, the quarter’s underlying replacement cost profits – effectively BP’s measurement of net income – beat analysts’ expectations and came in at about $2.8bn.
The one mild concern for the company would be its gearing levels, but with its established plans to strengthen its balance sheet in the next two years, I think the BP share price could be well worth buying.
