In the first part of this article, I recommended that investors take a serious look at ExxonMobil
With a market cap of more than $232 billion, BP is the world's second-largest energy company. It has more than 18 billion barrels of oil equivalents in proven reserves and operates 24 refineries worldwide. It is also, strangely enough, the largest oil and gas producer in the U.S. (shame on you, ExxonMobil).
Since I'm sure that the review of ExxonMobil's results caused some yawns, I'll try to keep my examination of BP's 2005 performance short and sweet (well, at least short).
Here goes. For fiscal 2005, BP reported revenues (excluding one-time gains) of $253 billion and income (also excluding items) of $21.3 billion, up 24% and 27%, respectively. This translated into earnings of $6.05 per American Depositary Receipt, a 34% increase over the $4.51 recorded in fiscal 2004.
At the risk of beating a dead horse, I'll say that these results were driven by increased realizations in both oil and natural gas prices, which averaged $48.75 per barrel and $4.87 per thousand cubic feet, respectively, in 2005. The average gain of 35% more than made up for the beating the company took from the explosion at its Texas refinery, which has been closed for four months, and from hurricanes Rita and Katrina, which BP estimated shaved a combined $3.4 billion from 2005 results.
Net cash provided from operating activities came in at $27 billion. BP, unlike ExxonMobil, is committed to returning all excess cash to shareholders, and it did so in terms of distributing a combined $19.8 billion in dividends (3.3% yield) and stock repurchases, while expending $14.1 billion on capital expenditures.
This generosity does have its drawbacks, though: BP has only a little more than $2 billion in cash on its balance sheet and boasts a debt-to-capital ratio of 19%, which is significantly ahead of ExxonMobil.
Akin to ExxonMobil, BP's overall results were impressive, since its production rate was essentially flat for the year and, as stated above, was negatively affected by various (hopefully) one-time items, ranging from damage to the company's Thunder Horse platform in the Gulf of Mexico to the Texas oil refinery explosion. (The refinery is expected to be operational again this quarter but will still have a negative impact of $600 million to $800 million.) Management, however, now expects production growth to average 4% through 2010.
Initial reserve replacement rates at BP were not as heartening as ExxonMobil's, coming in as they did at 95%. (The company hasn't issued a final estimate yet.) This weakness is likely due to its production sharing contract (PSC) issues. A PSC is a contract that a company has with a host country that permits it to develop a field but does not permit it to own the reserve itself. It is, instead, guaranteed a certain return and is paid via oil production. Since it is a financial, rather than volume, issue, less oil is needed to satisfy the return as oil prices rise.
Given that oil was priced at a year-end cost of $58/barrel versus $40/barrel in 2004, the company's share from these contracts was reduced in terms of volume. BP estimates that it loses about 500,000 barrels per day in volume when oil is at $60/barrel. Many analysts, however, believe that this pricing is unrepresentative of the long-term nature (20 years-plus) of the projects and should not be used in calculating reserves.
Stripping out the effect of the PSC issue, BP's replacement rate is approximately in the neighborhood of its five-year average of 134% and is likely to stay there through 2010 -- not shabby by any standard.
Given BP's projected 4% production growth, the ability to realize higher oil and natural gas prices (just like ExxonMobil), and the normalization of many disrupted operations, the company is expected to earn around $6.60 per ADR, which is a 9% increase over last year. Figuring in a conservative 20% increase in dividends this year (compared with a 21% jump last year) and share repurchases of around $13 billion (the company did $11.6 billion in 2005), shares of BP look extremely attractive, trading at 10 times fiscal 2006 estimates.
As I said before, ExxonMobil and BP aren't exactly the sexiest stock stories, but they represent the cream of the crop and should be core holdings for long-term investors in the oil patch. For those who relish a little more risk and perhaps a bit more reward, I would suggest looking at Motley Fool Income Investor pick Total SA
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