Can We Finally Put 2010 Behind Us?

On June 3, 2010, disaster struck. Eleven people died and BP's (NYSE: BP  ) stock tanked to $20 a share from $60 as the largest marine oil spill ever flowed out of the Macondo. That was more than three years ago, yet BP's share price still remains marred. Is this deserved, or is BP undervalued?

Huge cost
So far BP has spent $42.5 billion cleaning up the mess, which is a big reason why its stock hasn't moved over the past few years. As BP divested assets to pay off the damage, it lost plenty of cash flow from the potential production it missed out on. Since 2010, BP has divested $66 billion in assets to help pay for the blowout.

Plenty of money has been spent on the disaster, but does that justify BP's low valuation?

The future
In BP's latest quarter, earnings were 26% lower than year-ago results, but on the plus side they were up 36% from last quarter. Operating cash flow was flat year over year at $6.3 billion.

BP's management plans on increasing free cash flow to between $30 billion and $31 billion in 2014, which would be 50% higher than 2011 levels, after the disaster. BP hopes that for 2014 and beyond it can start growing again, past where it was prior to 2010. It is also looking to provide strong cash flow growth.

Part of delivering that cash flow growth comes from new major projects coming online. For 2014, BP plans on bringing five major projects online; two in the Gulf of Mexico, one in the North Sea, one in Angola, and one in Canada.

In order to start up major projects, you need recoverable resources to pursue. BP has completed 12 exploratory wells in 2013 with plans to finish 16-18 by year-end. Those wells found three discoveries last quarter; one in Egypt, one in Angola, and one in India. As BP keeps uncovering new recoverable resources, it increases the value of its assets. This could help move its stock price out of a rut.

2013
This year went much better for BP than last year in regards to stock performance. In 2012, BP was flat while the market rose 16%, but this year BP is up 13%. Keep in mind that the market did rally 26%, but at least BP's stock is climbing out of the $38-$44 range it was in previously.

So what has happened? In 2013, BP started up three major projects in the Gulf of Mexico, Australia, and Angola, with plans to complete the Chirag Oil project in Azerbaijan by year-end.

BP also announced that it was going to sell off $10 billion in non-core assets by 2015 and use the cash to buy back shares. This is on top of its $8 billion share buyback. While there is plenty of debate around whether or not buyback plans actually provide shareholder value, with BP's shares this low for this long it seems like a good idea.

BP raised its dividend by 5.6% last quarter, which points toward its financial resilience and expectation for the road ahead. The company plans on the same capital expenditures in 2014 as 2013, which allows for larger net income gains and which can be translated into a bigger dividend. BP currently pays out 4.7%, which is already quite hefty.

BP is doing more than just boosting its upstream operations; it also plans on modernizing its refineries.

WRMP
The Whiting Refinery Modernization Project is BP's way of capitalizing on cheap Canadian heavy crude oil. Currently BP's Whiting Refinery only has the capacity to process 20% heavy crude, but BP wants to increase that to 85%. That would allow the Whiting Refinery to process 350,000 barrels per day of heavy crude, up from 80,000 bpd currently.

Canadian heavy crude pricing, measured by the Western Canadian Select, trades at significantly lower prices than West Texas Intermediate. That differential would allow the Whiting Refinery to experience better crack spreads, which boosts profits.

Marathon Petroleum (NYSE: MPC  )  also sees the potential of Canadian heavy crude, which is why it added 80,000 bpd of heavy crude processing capacity to its Detroit refinery last year. It cost $2.2 billion to complete, but now that it's up and operational, Marathon Petroleum can reap the rewards of higher margins.

Final thoughts
BP has several initiatives to revive growth and return to its status as an oil major, but the big question is whether investors will finally be able to look past 2010. While liabilities from the disaster still linger and could end up costing tens of billions more, long-term investors should look past the legal fiasco and at BP's future over the next decade.

BP plans on controlling its spending while utilizing asset sales to buy back shares, all while boosting its dividend. This is a good combination for long-term value for those willing to see BP through its legal problems.

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