Is this Oil Stock a Bargain?

In April of 2010 BP’s stock (NYSE: BP) took a drastic turn downward – the public was outraged – and for good reason.  The Deepwater Horizion Oil Rig had an explosion which caused oil to flow continuously from the sea-floor gusher for 3 months.  The company went from $60 the day before the explosion to $27 in mid June three months later.  In a month it will have been two years since the explosion and I think that the cloud of doubt that was surrounding the company is beginning to fade away, yet that hasn’t been reflected in the stock price.  The fundamentals of the company itself were not changed by the disaster except through the effect of currently ending lawsuits and a loss of reputation.  Thus we could have a bit of a bargain situation on our hands.  Let’s dive deeper into this to see how the company is doing in some other areas.

If you didn’t know, BP is one of the world’s largest petroleum and petrochemicals groups. Their main activities include exploration and production of crude oil and natural gas; refining, marketing, supply and transportation; and manufacturing and marketing of petrochemicals. They also have growing activities in gas and power and in solar power generation.

As far as the statistics the analysts all go to, the P/E ratio is 5.5 compared to an industry average of over 11.  The company’s earnings per share ($2 per quarter) are above where they were before the oil spill – yet the stock that was $60 is only $44. The dividend yield is $1.92 which on that price is 4%.  And net income is at the highest point since June 2008.  Compare these numbers to Exxon (NYSE: XOM) which has double the P/E, nearly identical EPS, and half the dividend yield.  Or consider Chevron (NYSE: CVX) which has a P/E of 8 and EPS of 3.5 per share on a $100 stock.  Earnings per dollar of share price are $.035 for CVX, $.024 for XOM and $.041 for BP.

I don’t like to predict, but if I did then I would say that BP could go up 20%-30% in the next year or so as the rest of the market begins to jump back on the stock.  One final stat that I want to share is institutional ownership.  It is one that I find very revealing in this circumstance.  BP has 12%, XOM is at 50%, CVX has 65%, and Marathon Oil Company (NYSE: MRO) is at 83%.  Marathon comes out poorly on the above mentioned statistics as well such as a P/E of 13 even though it – just like BP – had a huge drop in its recent history.  That BP has only 12% shows that a lot of Wall Street is staying away from the company and as they begin to drift back in it could really boost the stock.

The financials are not extraordinarily persuasive, but the dividend yield, P/E ratio, EPS level, and relative institutional ownership are quietly but incessantly whispering to me, “buy, buy, buy.”  Statistics aside I think that this company is undervalued and I believe it is mainly due to the oil spill and as that slips further into the depths of the public’s memory I believe the stock price will rise faster than the rest of the industry.  People are bored with the stock right now and I think that makes it a great time to get in.

I haven’t covered many of the downsides but I will summarize them here.  My main fear is that the public won’t realize it is undervalued for a long time and thus my investment could just sit there not doing much, but I won’t complain about the 4% dividend.  Another risk is that gas prices will go down which could hurt earnings in the short term but hey I won’t complain about lower gas prices either.  A third and likely risk is that this will leave a bit of an oil smudge on your otherwise clean portfolio which is a completely understandable fear, but one whose complications I won’t deal with here.  Let me know what you think about the other possible shortcomings in the comment section.

Going by Peter Lynch’s categories this isn’t quite a turnaround, but it could likely be an undervalued stalwart with some decent room for appreciation.  I wouldn’t allocate my whole portfolio here but putting some funds in without any terribly apparent risk and solid potential seems like a reasonable move.  I haven’t made the move yet myself but I’ll be mulling it over for the next week or so and I’m leaning towards going in right now.