The five largest oil companies in the world -- commonly called supermajors -- have had mixed results in the last three years. Two have handily beaten the total return (stock performance plus dividends) of the S&P 500, two have roughly matched the 55% gain of the index in that span, and one is far behind.

Luckily for BP (NYSE:BP) shareholders, the London-based company leads the pack with a three-year total return of 77%. BP delivered impressive operating results in the fourth quarter of 2018 and has a slew of intriguing growth projects making their way through the development pipeline. Will the expansion efforts be enough to continue propelling the stock higher, or will it fall in line with peers?

An origami boat made of a $100 bill with miniature barrels of crude oil in it and an arrow above pointing up.

Image source: Getty Images.

Project growth and operating efficiency driving the business

Much of the company's success in recent years has come from the successful development of major growth projects and increased operating efficiency. In fact, BP has started up 19 major projects since 2016 and done so under budget and ahead of schedule, on average. It has also significantly reduced operating costs by boosting drilling efficiency and turning to new digital platforms and drone inspections to save overhead. That success has allowed the supermajor to grow production volumes 7% per year since 2016. 

When recently launched projects are combined with new projects expected to come on line in the next few years, BP thinks it can deliver at least $14 billion in pre-tax free cash flow by 2021, assuming oil prices of $55 per barrel. One-third of that will come from projects started up since 2016 and the 900,000 barrels of oil equivalent production per day (BOE/D) they'll add. That includes roughly 15 projects expected to come on line between 2019 and 2021, which will combine to deliver an estimated 350,000 BOE/D. 

Highlights include a focus on the U.S. Gulf of Mexico, including an expansion of the Atlantis platform network currently churning out up to 200,000 barrels of oil and 180 million cubic feet of natural gas daily. BP is also exploring a massive petrochemicals joint venture in Turkey, a fast-growing market supported by healthy demographics, and a floating liquefied natural gas platform in West Africa, strategically located near Southern Europe's import terminals in Portugal and not far from South America's growing customer base.  

An offshore oil platform.

Image source: Getty Images.

Another important area of growth, although small today, includes projects focused on clean energy. BP is strategically building out solar projects across the globe through its investment in Lightsource, while also preparing for a more electrified economy through the purchase of electric vehicle charging businesses. Management believes energy demand will rise up to 30% by 2040, while carbon emissions will need to be cut in half. It isn't shying away from the challenges and opportunities.

By the numbers

BP turned in solid fourth-quarter and full-year 2018 operating results. The business grew operating cash flow (excluding payments related to the Gulf of Mexico oil spill) 8% year over year to $26.1 billion in 2018. It more than doubled replacement cost profit -- used to account for variance in oil inventories -- compared to the year-ago period to $12.7 billion. Return on capital employed rose from just 5.8% in 2017 to 11.2% last year, which is a sign growth projects are hitting (and exceeding) the mark. 

A strong year of operations has resulted in shares that appear fairly attractive on several key valuation metrics -- forward earnings, the PEG ratio, and enterprise value (EV)-to-EBITDA ratio among them -- even after rising more than 46% in the last three years when dividends are excluded. Here's how BP stacks up to its supermajor peers:     

Company

Forward P/E

PEG Ratio

EV-to-EBITDA Ratio

Dividend Yield

BP

10.3

0.40

5.8

5.8%

Royal Dutch Shell

10.0

1.71

5.8

5.9%

ExxonMobil

14.4

1.20

7.5

4.2%

Total

9.1

21.1

5.5

5.2%

Chevron

14.9

0.43

7.7

4%

Data source: Yahoo! Finance.

As the table above shows, BP stock has the most favorable blend of key valuation metrics. It also has a hidden catalyst on the horizon: Payments to settle claims on the Gulf of Mexico spill, which may cost the business $65 billion or more when all is said and done, should begin to significantly drop off in the years ahead. 

BP stock could ride growth projects higher

Investors looking for a long-term investment giving them exposure to the global energy markets of today (driven by oil, natural gas, and petrochemicals) and tomorrow (driven by natural gas, petrochemicals, and renewables) may want to give BP a closer look.

After retooling its strategy in the wake of the Gulf of Mexico oil spill, the business has exceeded its cost-reduction targets for new projects in recent years. Importantly, management doesn't shy away from the risks and opportunities posed by the upcoming energy transition, and has already begun slowly putting the pieces in place. An attractively value stock, coupled with a forward-thinking growth strategy, could make BP a buy for investors with a long-term mind-set.

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