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The fortunes of Western oil majors are determined by the price of oil, production costs and success in the capital-hungry and risky exploration activity. Geopolitics and the global economy drive supply and demand for oil.
BP's recent history exemplifies the geopolitical dimensions, from the machinations of oligarchs and politicians in Russia to criminal and civil suits in the U.S.
BP is close to completing a $38 billion disposal program, which will reduce production and reserves by 10%, focus future production on higher-margin assets and release cash. Its future business model depends on:
- Improved profitability and cash flow from remaining assets: Q1 results were encouraging;
- Its near 20% stake in Russian state-controlled oil major Rosneft;
- Satisfactory resolution of the Macondo liabilities.
BP's Russian relationship gives it a stake in the world's largest oil producer, with the upside potential to add to reserves through collaboration in the Russian Arctic.
The slimmed-down business aims to bring new projects on-stream at double 2011's average margin, and to achieve $30 billion of operating cash flow by 2014, 50% more than 2011 (assuming a $100/bbl oil price).
CEO Bob Dudley is a veteran American oil man who served as TNK-BP's CEO in Russia before being forced out of the country. He used his Russian expertise to seal BP's Rosneft deal, but has operational as well as deal-making credentials: TNK-BP increased its output by a third under his leadership.
Outstanding liabilities for the Macondo disaster hang over BP. The company has provided $42 billion in total, with the maximum potential liability roughly equal to BP's £90 billion market cap.
The company has political risk in Russia, where it could suffer if it fell out of favor with the administration. The investigation into oil price-fixing could potentially grow to LIBOR-scandal proportions.
BP's balance sheet is relatively strong, with net gearing (debt: net assets) of 25%, higher than Shell's 10%, so the strong cash flow and surplus debt capacity could cover the worst-case U.S. scenario.
The shares have recovered about half the ground lost since the Macondo disaster, buoyed by an $8 billion share buy-back program to counter the earnings dilution of the Rosneft transaction.
The projected price-to-earnings ratio of 8.9 is slightly higher than Shell's 8.5, while the yields are similar at around 5%. BP's price to tangible net worth is 1.8, higher than Shell's 1.3.
BP stock reflects the playing-for-high-stakes character of its CEO. There's a big upside in Russia if all goes according to plan, but substantial risk until the U.S. liabilities are all settled.
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