This Energy Giant Is Still A ‘Buy’
Last week, I wrote an extensive piece detailing why big oil is having one of its best periods on record:
Exxon Mobil (NYSE: XOM) hauled in $6.4 billion in adjusted net income in the fourth quarter. BP (NYSE: BP) shattered expectations with a profit of $3.5 billion. Royal Dutch Shell (NYSE: RDS-A) banked earnings of $5.7 billion. That’s $15.6 billion from just three companies — in a single quarter. For the year, the combined earnings of the five super-majors — this trio plus Chevron (NYSE: CVX) and Total (NYSE: TOT) — reached an incredible $80 billion.
I also discussed why plans for a record $425 billion in spending on exploration this year should have investors excited.
In that piece, I mentioned that I’m saving my top pick on this trend for my High-Yield Investing subscribers only, but that there were a number of ways for investors to profit.
Today, I want to spend a little time on just one of the big oil producers — specifically, BP (NYSE: BP).
#-ad_banner-#BP was no exception to the record fourth-quarter results posted by the major energy giants.
The market was expecting an adjusted profit of $2.6 billion. The company delivered $3.5 billion, an increase of 65% over the same period last year. For the year, earnings more than doubled to $12.7 billion.
BP cut the opening ribbon on six new upstream projects last year, bringing the total to 19 over the past three years. Those investments helped boost production by 8.2% to 2.5 million barrels per day.
Incidentally, that’s the highest output since 2010 (the year of the tragic Deepwater Horizon blowout). Cleanup costs, legal settlements, and other lingering payments from the disaster amounted to $3.2 billion in 2018 and are expected to fall to $2.0 billion this year.
Excluding those payments, operating cash flows for the year topped $26 billion, easily covering the $15 billion in capital expenditures — leaving $11 billion in pure free cash flow. The company also raked in $3.5 billion in proceeds from non-core asset sales and plans to divest $10 billion more over the next 24 months.
Confident in what lies ahead, the board has already approved a modest 3% dividend hike to $0.615 per share, or $2.46 annually. That puts the yield within shouting distance of 6%.
It was a transformative year for BP, which is why the company raised dividends for the first time since the 2014 crash. And I’m excited about 2019 growth prospects following the $10 billion purchase of BHP Billiton’s (NYSE: BHP) shale assets.
This bold purchase was originally supposed to be financed with a mixture of cash and new shares. But BP now intends to pay entirely in cash, which speaks volumes about the current earnings environment.
This acquisition will be a key catalyst in 2019, adding 190,000 barrels of daily oil production. It includes prime acreage in the Permian Shale, which was chiefly responsible for Texas’ record output of 1.5 billion barrels last year — shattering the previous high of 1.3 billion set in 1973.
Action to Take
BP has been outperforming its peer group lately — which is one of the reasons my High-Yield Investing subscribers are up by more than 42% since adding it to our portfolio.
But given the impressive recent results, and the positive outlook going forward, it remains a “buy” at these levels.
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