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Thinking of Playing Big Oil Companies? BP Tops the List

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The West Texas Intermediate crude recently reached its highest point since November 2014, hitting $71.36 a barrel after President Trump’s announcement that the U.S. would pull out of the Iran nuclear deal.

Trump believes that Iran will refrain from developing nuclear weapons and put a check on its hostile activities only in the face of economic crisis. Meanwhile, the recovery in crude is definitely a godsend for energy players, especially when it comes to upstream businesses.

Investors keeping an eye on the energy sector are sure to follow oil supermajors — BP plc. (BP - Free Report) , Exxon Mobil Corporation (XOM - Free Report) , Chevron Corporation (CVX - Free Report) and Royal Dutch Shell plc (RDS.A - Free Report) .

In particular, the spurt in crude price puts the spotlight on BP from the Zacks Oil & Gas International Integrated industry, as it has a slew of factors working in favor of it. 

We have employed a few parameters to show why BP is the best bet among all oil supermajors.

Quite a Steal

In order to determine the value of the oil sector, we used the trailing 12-month Enterprise Multiple. This is because oil energy players typically shoulder significant debt pertaining to investments in growth projects and EV includes debt for valuing company or industry.

Enterprise Multiple = Enterprise Value (EV)/EBITDA

Among the oil bigwigs, BP is the least expensive. Per our proprietary model, EV/ EBITDA ratio for BP stands at 6.35, lower than 6.73, 9.26 and 9.60 for Shell, Chevron and Exxon Mobil, respectively. BP is also low-priced in comparison to the industry’s 6.83.

Although BP’s current EV/EBITDA ratio is higher than the five-year median value of 6.12, the stock still has significant upside potential given that the current ratio is considerably lower than the five-year high of 9.75.

Best Price Performance

BP's price chart is also impressive. Over the past year, BP has surged 32.9%, outperforming 30.5% and 21.2% of Shell and Chevron, respectively. In the same time frame, Exxon Mobil lost 3.2%.

BP also outperformed the industry’s run of 16.4%.

Stellar Q1 Show

BP reported first-quarter adjusted earnings of 78 cents per American Depositary Share (ADS) on a replacement cost basis, excluding non-operating items. The bottom line surpassed the Zacks Consensus Estimate of 67 cents and improved from the year-ago quarter’s 46 cents.

Total revenues were $69,143 million in the quarter, up from $56,386 million a year ago. Record oil and gas production along with increased refinery throughput drove earnings.

In the first quarter, total production rose 9% year over year to 2.605 million barrels of oil equivalent per day (MMBoe/d). Notably, since the October-to-December quarter of 2010, the first-quarter output has been the highest. On top of that, the January-to-March quarter output marked an increase in production for six quarters in a row.

Earnings Surprise History & Growth Story Impressive

BP managed to beat the Zacks Consensus Estimate in three of the last four quarters, the average positive earnings surprise being 29.6%.

Also, we expect earnings growth of 63.3% for 2018. Notably, over the last 60 days, the Zacks Consensus Estimate for 2018 earnings has been revised upwards to $3.07 a share from $2.70, as five of the seven estimates were revised upward.

Profitable Upstream Projects

BP has a strong portfolio of upstream projects which has been backing impressive production growth. Through 2016 and 2017, BP has placed 12 key upstream projects online. The company plans to add six key upstream projects through 2018. Of the latest developments, Atoll in Egypt has initiated production.

All the upstream projects that are either online or yet to initiate operations will help BP boost production by 900 thousand barrels of oil equivalent per day (MBOE/D) by 2021.

Shareholder-Friendly Policies

BP has been paying stable dividends to ADS holders for 14 straight quarters. Presently, the company’s dividend yield of 3.8% is way higher than the 1.8% yield of the S&P 500.

Notably, the better-than-expected earnings in the first quarter of 2018 reflected almost a 70% improvement from the year-ago quarter. This has raised chances of a hike in its quarterly dividend soon, which will mark the raise since crude had started to freefall almost four years back.

Apart from dividend payments, the integrated energy major has been focusing on share repurchases to return more value to shareholders. Through first-quarter 2018, BP spent $120 million on buying back 18 million worth of shares.

Last year, BP was the first energy player in Europe to recommence share buybacks after 2014, when repurchases were stalled as crude price was hit by supply glut woes. It is to be noted that since the restart of the repurchase program, BP has spent $460 million for buying back 69 million worth of shares.

Free Cashflow Positive

We calculate free cash flow after subtracting capital expenditures from net cash flow. If a company’s free cash flow is positive, it signifies that the firm can manage to finance capital spending from its operating cash flow.

Through 2017, the British energy giant generated $5.3 billion of free cashflow, turning around from negative free cashflow of $4.6 billion in 2016.

Bottom Line

These developments are reflected in BP’s VGM Score of A and Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Here, V stands for Value, G for Growth, and M for Momentum, and the score is a weighted combination of these three parameters. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Most importantly, our proprietary Stock Screener shows that BP is the only Zacks #1 Ranked stock in the Zacks Oil & Gas International Integrated industry. Meanwhile, Shell, Chevron and Exxon Mobil carry a Zacks Rank #3 (Hold).

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