BP, One Year After the Spill: A Slick Buy?

BP the Cash Cow

As the analysts note, it's going to be a good first quarter -- and potentially very good year -- for BP as long as oil prices don't collapse. So what can BP do with its bulging wallet, flush with cash yet with the oil spill liability overhang still in effect, that could serve as a positive catalyst for shares?

Oppenheimer's Gheit estimates that with every $1 change in the price of oil, BP makes $350 million, and with the recent run up in oil prices, BP just made an additional $7 billion to $8 billion in unexpected profits.

The two main financial incentives that analysts are debating are a reinstatement of a share-buyback program by BP -- for the first time since 2008 -- and the potential for BP to hike its dividend back to the generous rate it paid investors before the oil spill.

Raymond James' Molchanov said share buybacks would be a great catalyst for BP. "It doesn't take much to get a stock moving when it's trading at a really remarkably low multiple of 6.5 times current year earnings," the analyst argued.

ExxonMobil is known as the "serial" stock repurchase among the integrated oil companies, while BP has historically been more balanced between its cash deployment for share buybacks and for its dividend. Raymond James' Molchanov noted that the BP dividend was suspended as a direct result of the oil spill -- it was reinstated in the past quarter at half the rate, or 42 cents per ADR share. On the other hand, the BP stock buyback program was suspended well before the oil spill.

The Raymond James analyst doesn't view the potential for a share buyback as a distant dream with triple-digit oil prices. Raymond James estimates that BP will generate $33 billion in cash flow with oil above $100, and that is after paying the $4 billion cost of the spills claim fund. BP's spending budget is $20 billion, so subtracting the spill fund and spending from $33 billion indicates that BP still has $13 billion in free cash flow.

The recently reinstated BP dividend amounts to $5 billion annually, meaning that above and beyond the current dividend BP has $7.5 billion of free cash. Molchanov added that this cash flow figure could be low given that it's not including the $6 billion to $7 billion in asset sales BP still has said it will make, as well as more immediately, the proceeds from asset sales already announced but not yet closed.

Molchanov notes that $7.5 billion of free cash flow "is a lot of money and available for buybacks. I'm not saying BP will resume the buybacks immediately, and there are political reasons for holding off, but I think BP is in a good financial position to repurchase shares."

Oppenheimer's Gheit agreed, and prefers that BP resume share buybacks as opposed to increasing the dividend to its pre-spill level. "If there was something good about the oil spill, it's that the dividend was not maintainable at that level. The problem was internationally based oil companies like BP and Shell raising dividends because they succumbed to investors and analysts in Europe pushing for ever higher dividends," the analyst explained, adding that it would require $150 crude oil prices for these companies to be justified to go back to the level of dividend increase that they offered in the recent past.

"The new reality of the BP dividend is where it is today, but if they can settle litigation in the next year, a share-buyback program could be a possibility," the Oppenheimer analyst said.

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