Chris Lau, Kapitall: Oil and gas stocks like BP give investors a foothold on the energy sector. But are they worth the risk? BP ( BP ) reached a 52-week high after reporting quarterly earnings last week. In revealing a strong desire to return cash to shareholders, a disciplined exploration strategy, and less uncertainty with the Gulf of Mexico oil spill, BP made itself out to be on the way to a recovery. There are a number of reasons that may support this view. Click on the interactive chart to see BP price data over time. Sourced from Zacks Investment Research. Cost discipline BP is running the business more conservatively. It is continuing to exercise a capital discipline, which makes the company’s results more predictable. BP said that it expects capital expenditures (capex) in 2014 to be at levels similar to this year. This will be in a range of $24 – $25 billion. Read more on Energy from Kapitall: Drill Baby Drill: 8 Cash Rich Energy Stocks After 2014, BP expects capex will rise no higher than between $24 – $27 billion annually for the next decade. Dividend increase A 5.6% dividend increase starting December 2013 is another reason to consider BP as an investment. BP will need to maintain healthy cash flow this quarter, and to support a future increase in dividend payments. Healthier balance sheet To reduce its debt level, BP divested $38 billion. The proceeds will be used to buy back shares and to support additional distributions to shareholders. As of October 25, BP spent $3.8 billion buying back its shares. One of its biggest divestments this year was TNK-BP. The sale netted around $12 billion in net cash proceeds.
ExplorationBP highlighted two significant exploration discoveries in the quarter. For 2013, 12 exploration wells were completed, and eight are in progress. In all, BP will complete 16-18 exploration wells this year. Risks Business economic loss claims remain an uncertainty for BP, with the largest concern still coming from the Deepwater Horizon spill. The company already paid out or assigned $19.3 billion, and estimates an additional $1.029 billion in compensation claims since June alone is still on the table. Each week BP receives roughly 1,700 new claims for losses to businesses impacted by the spill. Investing ideas BP has the lowest forward P/E (also known as POP on Kapitall) compared to other major energy plays. Exxon (XOM) hovers at 12 while Chevron (CVX) has a forward P/E of 10. Only Total SA (TOT) has a forward multiple comparable to that of BP. Total SA and BP also offer investors a dividend yielding 6.3% and 4.65%, respectively. Click on the interactive chart to see POP data over time. Sourced from Zacks Investment Research. Conclusion BP‘s production levels look like they’re stabilizing, despite the divesture of businesses. The company is becoming less risky in some respects, as it aims to exit non-core businesses, reduce operational costs, and to return excess cash earned to investors. But it may surprise investors to note that crises like oil spills happen far more often than we think. Any investments in the oil and gas industry should be considered to have the potential to bring high risk, but also maybe high reward. (Written by Chris Lau, a Kapitall Contributor. Disclosure: Author is long BP.)