Many observers will wonder if big oil companies like BP (NYSE: BP) are still value investments.
Big Oil is unfashionable in the age of Greta Thunberg, but most of us still use its products every day. Moreover, BP could have lots of oil to sell Hence, BP meets at least one value criteria it is unfashionable and unpopular, but still has a lot of value.
In fact, BP claims to have found one billion barrels of oil in the Thunder Horse field in the Gulf of Mexico, CNBC reports. Hence, BP could increase production when Saudi Crown Prince Mohammed bin Salman (MBS) is offering hysterical warnings about “unimaginable rises in oil prices.”
How the Saudi Crown Prince could Help BP make more Money
Personally, I seriously doubt MBS’s claims because the Crown Prince is a politician trying to influence political outcomes in other nations. To clarify, MBS made the claims on the CBS TV Magazine 60 Minutes in the United States.
Thus, I think Salman wants to influence American popular opinion and boost his case for war against Iran. Historically, prewar claims; like President George W. Bush’s (R-Texas) assertions about weapons of mass destruction before the Second Gulf War, were false.
However, if MBS is even partially right, BP could generate more cash from oil in the short-term. To explain, BP can generate lots of cash from even brief increases in oil prices.
Is BP Making Money right now?
Currently, BP is making a lot of money from oil. For instance, BP reported quarterly revenues of $72.676 billion and a gross profit of $7.002 billion on 30 June 2019.
In addition, BP reported an operating income of $3.943 billion and a net income of $2.402 billion for the quarter ending on 30 June 2019. Thus, BP is making lots of money from oil.
Impressively, Stockrow reveals BP reported an operating cash flow of $12.111 billion on 30 June 2019. BP reported no free cash flow on 30 June 2019, but it reported a negative investing cash flow of $10.492 billion and a financing cash flow of $3.437 billion on that day.
Finally, BP is a cash-rich company reporting $24.193 billion in cash and short-term investments on 30 June 2019. Thus, oil is still black gold at BP and easily turned into cash.
Is BP a Value Investment?
I think BP could be a value investment because its stock was trading at $36.96 a share on 4 October 2019. Yet BP has vast amounts of value including:
- Wind farms that generate electricity in Colorado, Hawaii, Kansas, Idaho, Indiana, and Pennsylvania. Thus BP can still make money if drivers buy electric cars.
- Castrol; a major motor oil and lubricants brand, in the United States.
- Major natural gas operations in Colorado, Louisiana, New Mexico, Oklahoma, Texas, and Wyoming under the name BPX Energy. Natural gas is a popular substitute for coal in power plants that produce electricity. Therefore, BP has another way to cash in on electric vehicles.
- Four drilling platforms in the Gulf of Mexico.
- Operations in 78 countries worldwide.
- Oil and gas fields in the North Sea, the Gulf of Mexico, Azerbaijan, the Permian Basin, Vietnam, Angola, Indonesia, Australia, and Russia.
Therefore, BP owns vast amounts of oil and makes money but its stock price is low. That looks like a value investment to me.
Is BP a Good Dividend Stock?
Furthermore, BP is a good dividend stock right now. For instance, BP (NYSE: BP) paid a quarterly dividend of 61₵ on 8 August 2019.
In total, Dividend.com credits BP with a dividend yield of 6.60%, an annualized payout of $2.44, and a payout ratio of 71.8% on 4 October 2019. However, BP only offers one year of dividend growth.
Appealingly, BP is cheap right now its shares were trading at $36.96 on 4 October 2019.Thus, BP is a good stock for those who need dividend income and it is cheap. However, BP’s position is not as stable as you think.
How Mr. Market threatens BP and Big Oil
BP is in danger because the world is awash in cheap oil. There is so much oil, it is hard to keep track of the supply.
In fact, BP itself estimates Saudi Arabia’s oil reserves are 12% bigger than previous claims. To explain, BP raised its estimate of Saudi oil serves from 266.2 billion barrels in 2018 to 297.7 billion barrels in 2019, Reuters reports. Hence, there’s more oil than ever which could lead to major drops in prices.
Consequently, cynics like me view MBS’s pronouncements about high oil prices as a shallow attempt at market manipulation.
The Threat from Saudi Aramco
Notably, there is speculation Saudi Arabia is planning a $2 trillion initial public offering (IPO) for its national oil company Saudi Aramco. In addition, there are internet rumors Aramco stock could pay $75 billion in dividends.
Thus, the Crown Prince’s hysterical warnings look like a cheap attempt to boost Aramco’s stock prices. I think if MBS was an American CEO, the Securities and Exchange Commission (SEC) would investigate him.
Notably, the SEC accused Tesla Motors (NASDAQ: TSLA) CEO Elon Musk of violating a securities fraud settlement with Tweets, in March, Vox reveals. To explain, the SEC accuses Musk of making questionable claims about Tesla production in Tweets.
MBS’s behavior on 60 Minutes was worse than Musk’s, but the SEC cannot touch the Crown Prince because he is a foreign head of state. However, the SEC could ban Aramco stock from trading in the US.
The Crown Prince’s antics could harm BP and all oil companies if somebody exposes MBS as a fraud and a liar. To elaborate, I think nobody will believe any claims from any oil company if the public views Aramco as a fraud.
How Trump Impeachment could Hurt Big Oil and BP
A related nightmare for Big Oil is the impeachment inquiry beginning in the U.S. House of Representatives. To elaborate, political analyst Jeff Greenfield thinks up to six House Committees could investigate wrongdoing by President Donald J. Trump (R-New York).
I think one of those committees could uncover Trump involvement in the Aramco deal. Such an investigation could spread all of Aramco’s dirty secrets all over social media and the internet creating a public relations nightmare for Trump and big oil.
I think impeachment could lead to Saudi Arabia because of the money, the President’s family company, the Trump Organization makes from the Saudis. For instance, Business Insider claims the Trump organization has had business dealings with Saudi Arabia for over 30 years. In particular, Business Insider alleges one official Saudi visit boosted revenue at the Trump International Hotel in 1st Quarter 2018.
Companies like BP could suffer by their association with Saudi Arabia. However, value investors could benefit from falling oil stock share prices.
BP’s Odd History and Fascinating Future
One of BP’s greatest values is its proven ability to survive, thrive, and make money in different but chaotic eras of history.
BP LLC (NYSE: BP) began life as the Anglo-Persian Oil Company Ltd in 1909 and became the Anglo-Iranian Oil Company, Ltd, in 1935. The company became the British Petroleum Company in 1954, BP Amoco in 1998, and just BP in 2000.
Anglo-Persian began when British entrepreneur William D’Arcy learned of possible oilfields in Persia (Iran) from explorer George Reynolds. In 1901, the Shah (Emperor) of Iran gave D’Arcy a 60-year concession to search for oil and gas in Persia.
In 1908, D’Arcy’s exploration teams struck black gold with a 25 meter high fountain of oil at Masjid-i-Suleiman. That find enabled D’Arcy to hold an IPO and begin work on pipelines and a refinery.
How Winston Churchill Saved BP
Despite striking oil, Anglo-Persian was nearly bankrupt by 1914. However, an unlikely savior appeared in the form of Winston S. Churchill. Churchill was in charge of the Royal Navy as the First Lord of Admiralty.
The Royal Navy was converting its ships to burn oil to make them faster, but Britain then had no oil. However, Britain had an oil company with a dedicated supply; Anglo-Persian. Unfortunately, Anglo-Persian was bankrupt.
Churchill helped Anglo-Persian out of bankruptcy in two ways. First Churchill had the British government bailed Anglo-Persian out by purchasing most of its stock in 1914.
Second, Churchill arranged for His Majesty’s government sell the assets of a company called British Petroleum to Anglo-Persian. The original British Petroleum was a German company with a distribution network in the UK. The British government seized British Petroleum when World War I began.
With Churchill’s help Anglo-Persian became one of the world’s largest oil companies in time for the auto boom of the 1920s. By 1938, Anglo-Iranian’s Ābādān refinery was the world’s largest.
Anglo-Iranian to BP
Anglo-Iranian became a holding company called British Petroleum in 1954, but remained under government ownership. In 1977, the British government began selling shares to the public. They privatized British Petroleum in the 1980s.
In 1987, BP bought is American subsidiary the Standard Oil Company of Ohio. In 1998, BP merged with the US oil giant Amoco to create one of the largest oil companies in the world. In 2000, they formed BP LLC after the acquisitions of Burmah Castrol and the Atlantic Richfield Company or ARCO.
BP is a major player in convenience stores, filling stations, and renewable energy. In 2010, BP survived the Deepwater Horizon catastrophe the largest oil spill in history on a drilling rig in the Gulf of Mexico.
Historically, BP has been one of the world’s most prominent oil companies. For instance, BP was one of the Seven Sisters, the seven giant corporations that dominated the global oil market from World War II until the mid-1970s.
Today, Oil & Gas IQ lists BP as the world’s fifth largest oil company, and third largest publicly traded oil company. According to Oil & Gas IQ, the world’s largest oil companies are:
1. Sinopec (NYSE: SNP)
2. Saudi Aramco
3. China National Petroleum Corp (CNCP)
4. Royal Dutch Shell (NYSE: RDS)
5. BP PLC (NYSE: BP)
6. ExxonMobil (NYSE: XOM)
7. Total (NYSE: TOT)
8. Valero (NYSE: VLO)
9. Gazprom (OTCMKTS: OGZPY)
10. Phillips 66 (NYSE: PSX)
In conclusion, I think BP and the rest of big oil are still value investments. However, these companies are in for a bumpy ride in the years ahead. BP will make money for years to come so it is still a value investment for those who can stomach big oil.