BP starts crawling back from disaster

Much reviled -- and still rejected by investors -- the oil giant now offers the potential for higher reward than rivals such as Exxon.

By Jonathan Berr May 1, 2013 11:23AM
Three years ago, BP (BP) was one of the world's most reviled companies after the deadly rig explosion and massive oil spill in the Gulf of Mexico. Now, Europe's second-largest oil company is winning friends again on Wall Street.
The London-based company earned $4.22 billion in profit, excluding some costs, in the most recent quarter, about $1 billion better than analysts had predicted. A strong performance in its fuel trading business offset a 5% decline in production and a drop in oil prices. BP's refining business also is improving as margins rose to $17.80 a barrel from $14.75 a year earlier.

Oil drilling platform © Scott Gibson CorbisBP should benefit from investing $25 billion in exploration projects. Indeed, the dire warnings of oil shortages that have been made for years haven't come to pass. It's gotten to the point where an Atlantic magazine article recently posed the question: "What if we never run out of oil?"

The U.S. in benefiting from the boon as well. North Dakota might have three times more natural gas than originally thought.

Of course, the 2010 Gulf disaster remains a major issue for BP. The company estimates its costs from the spill at $42 billion, much of which it has covered via major asset sales. Nevertheless, some of the lawsuits associated with the accident have yet to be settled, and the company faces as much as $17 billion in fines for violating the U.S. Clean Air Act.

These costs are enormous, but for a company with a market value topping $138 billion, affordable. Insurance companies will likely reimburse BP for most of these expenses. Investors, though, continue to avoid the shares, which have barely budged this year.

However, BP is starting to look attractive. Its shares trade at a price-earnings multiple of 11.79. Although that's a five-year-high and steeper than the comparable 9 valuation for Exxon Mobil (XOM), BP looks like a better bet.

The analysts’ average 52-week price target on BP's shares is $50.77, about 16% higher than where they recently traded. That's more than double the 6.5% potential upside for Exxon. BP is also courting investors with a dividend that offers a fat 5% yield versus Exxon's 2.9%.

Clearly, BP faces plenty of challenges, but it also offers investors the potential for high rewards with moderate risks.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.
Tags: BPoilXOM


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