BP Just Opened Up it Wallet, is it Signaling Better Times Ahead for This Oil Giant?

A few days ago, BP (BP 1.58%) announced plans to acquire gas company Kosmos Energy (KOS -1.32%) in a $916 million deal.

In this week's episode of Industry Focus: Energy, Motley Fool analysts Taylor Muckerman and Sean O'Reilly explain what this will mean for BP, why the oil giant is looking more attractive for investors than it has in a while, and why Foolish investors might want to take a closer look at the company sometime soon. Also, the hosts talk about President Obama's action to permanently ban oil drilling in parts of the Atlantic and the Arctic, and share four energy and industrials stock picks for the end of the year.

A full transcript follows the video.

This podcast was recorded on Dec. 22, 2016.

Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, December 22nd, 2016, so we're talking about energy, materials, and industrials. I'm joined on air today by my podcasting partner in crime, Mr. Taylor Muckerman. What's the good word, Taylor?

Taylor Muckerman: Missing you in the studio, my man.

O'Reilly: I'm sorry, I already had to travel home. They had a travel deal and I couldn't pass it up.

Muckerman: I get it.

O'Reilly: I'm home for the holidays.

Muckerman: Happens to the best of them.

O'Reilly: It does. And I am the best. So, anxious to get your thoughts on what BP has been up to. OPEC has cut production, BP has been one of the more farsighted of the oil majors. Break it down for us.

Muckerman: Yeah, this is a company that we highlighted a few weeks back as one of the majors that people might want to stay tuned into, and they're showing why. They're becoming much more gas heavy with the latest $916 million investment in Kosmos Energy. They're obviously growing in natural gas after an acquisition in Egypt last month. So this is just adding to that portfolio after they've been selling off assets over the last few years, ever since the Macondo spill in the Gulf of Mexico. I think they sold off around $50 billion in assets, trying to help pay off that $60 billion in fines, fees, and whatnot that came with that unfortunate mishap in the Gulf of Mexico. So they're finally done shedding assets, and they're starting to add more things on the books. Leaning more toward natural gas, though.

O'Reilly: Yeah. I have two ways I want to talk about this. One, I was surprised to learn that BP and its partner, Kosmos Energy, they're vesting $1 billion each. That $2.2 billion deal is only going to be 10% of this oil/gas field that's in the United Arab Emirates. That's a large field.

Muckerman: It is. You're talking about a very significant increase in their accessible assets here now, on the gas side of things. It seems like $1 billion here, $1 billion there. But BP is definitely gearing up to ramp up production in the near and long-term future. They've already been talking about a $9-billion gas project internally. This is just adding onto that.

O'Reilly: This is just guessing here, but I was surprised that BP was investing to get such a minority stake. Was the price that good? What do you think was the thinking here?

Muckerman: Not only is the price seemingly alright, but they're going to be the operator. They're going to be the one doing the drilling in the exploration. From that point of view, I think that's a benefit, because all things to do with Macondo and the Gulf of Mexico disaster aside, BP is very experienced in oil and gas exploration production. So I think you now have the player that should be producing these assets at the wheel. I think that's one of the bigger things you need to pay attention to with this deal with Kosmos Energy.

O'Reilly: How should Foolish investors interested in the energy space be thinking about this? When I see something like this, I see, it would be awesome if we could be all clean energy, everybody doing solar and wind and all that, but at the end of the day, that's actually very difficult, and it's going to require trillions of dollars. Is natural gas the segue to get us there? It does seem like more and more people are using it, and it is slightly cleaner than oil. Can you add some color here?

Muckerman: Yeah. When you look at global energy production, we'll start with the U.S., in particular, natural gas overtook coal as the leading producer of electricity and power here in the United States this year for the first time ever. I don't expect that to look back, because we're producing gas at such a level that prices have remained subdued for some amount of years now. But we can produce it profitably. If you look at Europe, several countries there are talking about being completely done with coal over the next one to two decades. They don't really produce a lot of natural gas. They do have the assets there, but they haven't allowed those assets to be produced. So natural gas from other parts of Asia, and the U.S., in particular, are going to be needed. Since we now have exportation of LNG on the table -- with Cheniere [Energy] down in Texas and a few more trains probably coming online from them in the next couple of years -- and then Cove Point LNG here on the East Coast, perfectly geared toward delivering natural gas to Europe. And with this field over in Africa, even better access to a market that's not producing an energy source that they need.

O'Reilly: Awesome. Before we move on, what do you think of BP's stock these days? You have the 6%-7% yield, it's still at a multi-year low, the lowest level since the Deepwater Horizon spill. What's your thinking there?

Muckerman: You've seen it bounce back a little bit from the new year, but that has been an industry trend, not necessarily BP in specific. But yeah, it was trading over $50 a share in the middle of 2014. Right now, it's right around $37 a share. That dividend yield is very enticing. Because of all those assets they sold off, it's fairly secure. I think, you look at this company, it's a large cap, diversified. I think focusing on natural gas is definitely going to pay off in the long run, especially as you see major oil producers and major oil-producing countries still trying to figure things out. A lot of scrambling going on. And there's a lot less uncertainty, I think, about the future of natural gas at the moment.

O'Reilly: Awesome. Thanks for that, Taylor. Next topic here, Obama's last drilling stand. He cited a 1950s law when he did this. Before he's leaving office in a month, he decided to ban drilling in parts of the Atlantic and the Arctic. Should investors in this space care? Is this surprising? What's the deal here?

Muckerman: It's been used before, but never in such a permanent fashion. The Outer Continental Shelf Lands Act of 1953. He's basically taking the Northern Arctic and some of the Atlantic Shelf off the table, in terms of potential drillable assets. No one owns these yet, but it takes off the ability of any future president to put these up for auction in these blocks out in the Northern Arctic and Atlantic Shelf. But as of right now, I don't think it's that big of a deal. There's been lawyers on the environmental side that say, "This can never be retracted." Then you have a representative from the American Petroleum Institute saying, "Oh yeah, they're going to lawyer up, we're going to get this repealed." Depending on which way you want to go. I think you're probably going to see President-elect Trump, once he's in office, try to repeal this, because he did run on a platform of expanding U.S. fossil-fuel production, and there supposedly are pretty vast reserves in the North Arctic. You saw Shell give it a go for a couple years, but they have since backed out after spending nearly $10 billion preparing and trying to drill. They did drill, they didn't find exactly what they were hoping to. Then you saw, prior to that, they had a rig run aground up there in Alaska. It's a very treacherous environment up there, in terms of oil drilling. So not only that, but it is also quite costly, in terms of dollar per barrel. 

O'Reilly: That's what I was going to mention. He's banning ridiculously expensive oil in the first place.

Muckerman: Yeah, this is long-tail oil. This is not something we're going to need in the next handful of years, maybe even a decade or two. If you look at how Shell is doing, or how OPEC has been able to continue to increase their production, obviously they're cutting starting in January, but there's plenty of excess capacity that's much cheaper out there. I think, it might take lawyers a few years to get this all sorted out. But I don't think there's going to be a sudden moment where everyone has their tails between their legs because we're running out of oil, and this 3.8 million acres in the Atlantic and 115 million acres in the Arctic are going to be needed. I think it's quite the big hullabaloo right now because, when you say a forever ban, that's a pretty big deal, and no one has done it yet in the history of the United States. But at least he's not banning oil that's more easily accessible, and that won't cost triple digits per barrel to produce.

O'Reilly: Right. Really quick, before we move on, to our understanding, this doesn't even affect any publicly traded companies.

Muckerman: Yeah, to my understanding, no. Obviously, the prospects that they could have been on some of these blocks in the future. That's hard to determine. You would imagine it would be a major integrated, because only Shell has tried so far, that I can think of, and it didn't turn out very well at all for shareholders.

O'Reilly: No, it didn't.

Muckerman: Maybe this is actually a good thing for shareholders, because it's going to not allow these companies to take this risk until it's absolutely necessary.

O'Reilly: For sure. OK. Well, before we head out, Taylor, I want to get a couple of stock picks from you. I came up with two, as well, for everybody's stockings. Do you want to go first, or should I?

Muckerman: We can go one and one, then one and one if you want.

O'Reilly: I like it.

Muckerman: OK. I'll go first. We've been talking about oil, but we do say this is an energy, materials, and industrials show. So, my first stock is going to come from the industrials sector. Speaking of aerospace... that's Boeing (BA -0.24%). Despite President-elect Trump's Twitter rant about the high price of new Air Force Ones, I still think that Boeing is a great stock to check out for the long term. Maybe that brief sell-off is providing a little bit better opportunity for long-term investors. It has a great free-cash-flow yield. You're looking at over 7% based on FY15 free cash flow. So, even higher, if you look at the increase for FY16, fiscal year 16.

They've made some changes that I think are going to be beneficial for the long term, create a floor for some of their production lines. They cut the production of their 777s to 3.5 planes per month starting in about 2018. So, unlikely to get any lower. It gives analysts creating their price targets and folks like you and I that can understand that, if there's a floor there, there's how much more upside with limited risk. They've been hiking their dividend, authorized a $14 billion share repurchase policy. About 80% of their backlog is fixed and priced already through 2020. A few years of foresight there. And one major thing I do want to bring up is, they brought on a new CEO of their Boeing Commercial Aircraft division, which provides around 70% of Boeing's revenue, only expected to grow as a portion of that, because they're in discussion about Boeing Global Services, a new services segment that they're really bullish on. The new CEO just happens to come from GE, where he ran GE Aviation Services. So he has great experience, an outside perspective...

O'Reilly: That's the guy you would want.

Muckerman: Yeah, exactly. He's coming from a company like GE that has probably dealt with quite a few, if not all, of Boeing's competitors in the space, so he's going to have some insider knowledge there. Holiday appropriate, his name is Kevin McCallister.

O'Reilly: Boom. Love it. Hopefully he doesn't set too many traps for everybody.

Muckerman: For the competitors would be fine.

O'Reilly: The competitors, yeah. Real quick, I'll be brief, I wanted to highlight Crescent Point Energy (CPG 2.84%). They are a Canadian oil producer.

Muckerman: Yes, they are.

O'Reilly: I'm anxious to get your thoughts.

Muckerman: If folks want to read more about it, fool.ca, we have plenty of coverage. 

O'Reilly: Yeah, there you go. They are primarily based, correct me if I'm wrong, in western Canada, as well as a few northern U.S. states, North Dakota, and Montana. They might also be in Colorado.

Muckerman: Yep.

O'Reilly: I've been very impressed with them. I did a deep dive on them last week. They increased production this last year by 10%, even though they were cutting their capex budget. They have been free-cash-flow positive throughout the entire downturn in the last 12 months. They generated free cash flow of 240 million CAD. They trade at a discount to their peers like Suncor Energy and Imperial Oil. They trade for about 1.6 times tangible book value. These guys are 0.97 times. If you're a believer in a bit of an oil rebound, I would highly recommend checking them out.

Muckerman: Perfect, yeah. I can't argue too heavily against that selection. As I mentioned, fool.ca, you can check out all we have to talk about in Canada about CPG. My second stock, reverting right back to the energy sector, not a producer, but I'm going with Enbridge (ENB 2.83%), also a Canadian company, but you can buy it in the U.S. You don't have to go up to the TSX to acquire shares of Enbridge. CPG is also traded in the U.S. I'm looking at this company because they're becoming much more balanced in terms of their pipeline throughput, they're lowering their liquids from about 84% to 49%, because the acquisition of Spectra Energy, which is a much more natural gas-heavy pipeline company. I see tons of synergies here. Expectations to grow the dividend per share by about 15% in 2017, up from their previous targets. Then they're targeting, still, a double-digit increase through 2024 per year, and that's between 10%-12%. If you love dividend growers, along with a company that could also accelerate the share-price growth, then I think Enbridge is a great place to look. I'm a Spectra shareholder, so while I wish I could have just held Spectra, I'm still going to hold those Enbridge shares when it finally goes through, just to maintain that access to Spectra's valuable assets on the East Coast, which is fairly underserved in the natural gas market.

O'Reilly: Awesome. My final pick here I wrote about in an article on fool.com, which was recently posted, 3 Oil Stocks to Buy Just in Time for the Holidays. My pick was Noble Energy (NBL). These guys are primarily offshore. They have some onshore shale drilling. I believe the [...] was out of Colorado, but they shut that down when the downturn started. They're primarily focused now on the Gulf of Mexico here in the U.S. and the Mediterranean. They have a huge field over there in the Eastern Mediterranean. They are also off the coast of Africa. Low-cost producer because they have these long-tail projects, and they're increasing barrels of oil equivalent production this year 6%. I think they're probably going to come in at about 425,000 barrels of oil equivalent per day this year when all is said and done. They'll be cash-flow breakeven this year. I've been very impressed with their ability to keep a lid on costs throughout the obvious uncertainty they've been dealing with. They are part of the natural gas global trend we were talking about earlier. They recently signed a contract with Jordan's National Electric Power Company to supply natural gas from that huge field in the Mediterranean. I think it's called the Leviathan Field. How's that for a name?

Muckerman: It speaks to the size of the asset base there, Leviathan.

O'Reilly: Yeah, it's appropriate. For those of you that are curious, they're probably going to lose money this year on a GAAP basis, but as we all know, there are all kinds of fun write-offs on there. But they'll probably be earning $3-$3.50 a share at the end of the decade. I highly recommend checking out Noble.

Muckerman: We covered the gamut there. We have a pipeline, the biggest in North America, once they combine, offshore drilling, Canadian producer with some U.S. assets, and one of the bigger aerospace manufacturers in the world.

O'Reilly: Wow, that's a diversified portfolio right there. Drop in some Johnson & Johnson and you're good to go.

Muckerman: Yeah. And there's some dividends right there for you.

O'Reilly: Yes sir. Well, thanks for your thoughts, Taylor! Have a great holiday!

Muckerman: Yeah. Same to all of our listeners out there.

O'Reilly: That is it for us, folks. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at [email protected]. As always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Taylor Muckerman, I am Sean O'Reilly. Thanks for listening and Fool on!