BP Might Be an Undervalued Oil and Gas Stock But is it Worth A Second Look Yet?

Chris Lau, Kapitall: Investing in oil and gas stocks might give your portfolio the energy boost it needs, but what's the best source?

Oil and gas stocks have brought in a decent return for investors in 2013. But one energy company that just can’t seem to shake off volatile press coverage is BP ( BP ). Does that mean it’s not worth a closer look?

Read more on Oil from Kapitall: Are Crude Oil Refining Stocks in a Sweet Spot for Energy Investors?

BP is still actively campaigning against abuses stemming from the settlements for the Gulf of Mexico oil spill in 2010. The company’s shares are already deeply undervalued, so as the cases against the company are reviewed, the cloud over BP could lift.

Click on the interactive chart to see BP's share price over time. Sourced from Zacks Investment Research.

Complaints in Gulf settlement

BP took out an ad in many national newspapers complaining that a tax refund claim by an escort service to the IRS was refused. Conversely, the Gulf Settlement Program approved the claim for over $173,000. But payment by BP will be on hold after Judge Barbier suspended settlement payments to businesses.

This might seem like a small claim when you consider that BP allocated roughly $42 billion to cover settlements related to the spill, and so far the company has already paid out over $20 billion. And that doesn’t even include the $4.5 billion in fines due to the US government related to the oil spill in the Gulf of Mexico.

Valuation

So where does BP’s stock price fit in? The oil and gas stock dropped to $27.02 in June 2010 from a high near $60 a few months prior. In the last few weeks BP’s share price has hovered around the $47 range.

Looking at valuation metrics, the forward P/E for BP is on the low side, around nine. But several international oil and gas competitors seem to have more favorable valuations, including Petrobas Argentina (PZE), Statoil ASA (STO) and Total SA ( TOT ).

Click on the interactive chart to compare analyst ratings for these oil and gas stocks over time.

BP’s dividend yield is a rich 4.85%, thanks to the low share price combined with management’s commitment to return cash to shareholders through both share buybacks and dividends. But they aren’t the only energy company that knows how to reward shareholders:

More upside for BP?

As more fraudulent claims are brought to light, the negative perception for BP may see a reversal. BP took massive write-downs and paid for it in selling assets. Now as a leaner, more focused company, BP offers a steady dividend for income investors. 

Growth could come from conservative exploration projects. BP expects to complete between 16 and 18 exploration wells in 2013. So will shareholders benefit from a change in corporate culture to place safety in projects first?

 

 

(Written by Chris Lau, a Kapitall Contributor.  Disclosure: Author is long BP.​)

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