Is BP PLC a purchase? – The madman

As shareholders of BP (NYSE: BP) are well aware, the company has experienced many setbacks over the past decade. First, there was the catastrophic Deepwater Horizon oil spill in the Gulf of Mexico, and then the drop in oil prices in 2014-17.

But in 2018, the BP stock came back in force. Oil prices are high, production is up and the company is paying a large dividend. Of course, BP's peers love Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B) are also outperforming. Nevertheless, let's take a look under the hood to make sure that BP can maintain this momentum, so we can know if the stock is a buy.

The year 2018 has been excellent for investors in the oil industry up to now. But can BP continue to outperform? Source of the image: Getty Images.

The power of the price

To see how much the price of oil affects BP's performance, look no further than profit margins. This five-year chart of BP and Shell profit margins over a twelve-month period is superimposed on the price of a barrel of Brent per barrel (red line) and shows the profitability of major oil companies before the price declines, and how they recovered from its depths in early 2016:

BP Profit Margin (TTM) data by YCharts.

What you may notice about this chart, is that even though oil prices have not yet returned – and will never come back – to their highest of $ 100 a barrel, the profit margin of Shell is now higher than it was just before the price collapsed. and BP has almost recovered.

This is due to the cost reduction measures taken by the major oil companies during the price decline. By rationalizing their operations for profitability, oil prices around $ 50 a barrel, as they were largely in 2016 and 2017, allowed BP and Shell to outperform when oil prices finally exceeded $ 60 per barrel at the end of 2017.

Profitable level

BP's chief financial officer Brian Gilvary said the company's break-even point – the price of a barrel of oil at which it will cover its production expenses – is about $ 50, but BP plans to continue cutting back its costs and to reach its break-even point. between $ 20 and $ 40 a barrel by 2021. If BP can be as profitable at its current equilibrium point, imagine how much it will earn an extra $ 10 to $ 15 per barrel, since it produces 2 , 5 million barrels. oil equivalent per day.

Of course, this assumes that oil prices do not plummet, which is far from a guarantee. However, even in the depths of falling oil prices, oil prices per barrel have remained essentially above $ 40, falling just below that level for about four months, from December 2015 to April 2016 .

Hypotheticals are of limited value, but if BP had reached a break-even point of $ 35 per barrel or $ 40 per barrel during the recession, it would probably have worked in a negative way in 2015 and 2016, thanks to its lucrative refining and marketing. , which is not directly affected by oil prices. This bodes well for results, even in the event of a future slowdown in the price of oil.

Fly high

BP's high profit margins were posted during the last quarter, in the second quarter of 2018, as the company recorded impressive numbers both financially and operationally.

Sales increased 34.2% year-on-year to $ 76.9 billion. BP converted this revenue to $ 2.9 billion (with a "b") of net income, compared with $ 156 million (with a "m") in the second quarter of the previous year. Operationally, BP was operating at full capacity, with total production up 3.3% from the same quarter of the previous year. Production is expected to continue to grow thanks to BP's acquisition of American shale assets from the Anglo-Australian firm BHP Billiton.

In addition, the company increased its dividend for the first time in four years and proceeded with a share buyback of $ 200 million. If BP manages to continue in this direction, shareholders should have no reason to complain in the months and years to come.

And the answer is …

BP appears to be fully recovering from the slowdown in oil prices and has made steady progress to improve its operations and reward its shareholders. With oil prices showing no signs of weakening, it is likely that BP will continue to outperform. BP looks like a solid buy.