It's pretty hard to find someone who's never heard of BP. Aside from the fact that there are BP gasoline stations speckled all over the country, there was that little thing called the Macondo well blowout back in 2010 that everyone seems to remember. However, the business behind the name is very different from all those gas stations, and the Macondo spill is fading further into the rear view mirror. Perhaps the most important thing people should view BP as is a potential investment, because there is good reason to believe the company has a bright future ahead.
I can't say for certain that BP's shares will go up by a given percentage within a year or so, and even if I did the chances of me getting it right are slim to none. Rather, the case that BP could be a long-term buy and hold stock does hold water. Let's take a look at three reasons why investing in BP could work in your favor.
1) Strong economic fundamentals for oil & gas in the upcoming decades
This is a general truth for the entire oil and gas industry, but it applies to BP just as much as the rest. Unless there are some major--and I mean completely transform the world overnight kind of major--advancements in alternative energy, oil and gas will remain among the largest energy sources. The biggest driver of this will actually be the developing world. Despite projections that OECD member nations' oil demand is expected to be flat over the next several decades, the US Energy Information Administration projects that demand from non-member nations will double.
Source: US Energy Information Administration
BP--and just about every other integrated oil and gas company for that matter-- estimates that annual oil and gas demand will both increase at approximately 1% and 2%, respectively. This leaves BP ample room to grow its current operations through the wide array of projects it's currently evaluating today.
Source: BP Investor Presentation
2) It's now a leaner company that generates better cash flow with marginal impact on its future
A few years ago following the Macondo well blowout, BP was forced to sell off a large amount of assets to help cover the costs of cleanup and the trust fund it set up to compensate businesses that were affected by the spill. Along the way, though, it discovered that by trimming its asset base, it could actually improve cash flow, financial performance, and future production. The best way to show this is with BP's upstream business. While it divested itself of 35% of producing wells, it has only seen proven reserves reduced by 10% and lost just over 8% of daily production.
This asset divestment has been a change in strategy for the company, and now its primary focus is in cash flow generation from operations to fund shareholder-friendly initiatives such as dividends and buybacks. Since it's divestment program started, BP's projected cash flow for 2014 is expected to be 35% higher from 2011. 
Source: BP Investor Presentation
In fact, BP has been the only integrated oil and gas player to actually see cash flow after capital expenditures and dividends improve over the past three years.
| Company | Cash flow after capex and dividends (1st half 2011) | Cash flow after capex and dividends (1st half 2014) |
| BP | $0.7 billion | $1.7 billion |
| Exxonmobil | $10.3 billion | $3.7 billion |
| Chevron | $5.1 billion | ($5.0 billion) |
| Royal Dutch Shell | $6.2 billion | $3.8 billion |
| Total | ($0.5 billion) | ($5.4 billion) |
Source: S&P Capital IQ
Also, it is the only one of this group to improve its average return on capital employed over the past five years.
Source: ExxonMobil Investor presentation
One thing that bodes well for BP to continue this trend is management's conservative investment decisions. According to BP CEO Bob Dudley, all projects currently under evaluation need to be able to meet certain return metrics with an $80 per barrel of oil price. This type of conservative management should enable it to not only weather any storms from lower oil and gas prices, but it will also lead to pretty fantastic returns at current prices.
3) Advantaged access to major growth markets and abundant known resources
In order to take advantage of that expected growth from developing nations, integrated oil and gas companies will need to have a footprint there. This plays very well into the hands of BP, because it has operations in all of the BRICS countries--Brazil, Russia, India, China, and South Africa. These five nations alone account for 40% of the world's population, 18% of the global economy, and have been responsible for 71% and 27% of total oil and gas consumption growth over the past 10 years, respectively. With downstream facilities in all but Russia, BP is well positioned to serve these fast-growing markets
Also, BP has what you could call an ace up its sleeve when compared to other companies in the integrated oil and gas space: A 19.75% ownership stake in Russian oil company Rosneft. Rosneft is by far the largest producer in Russia, and its proven reserves are absolutely massive. Owning that much of the company means BP has ownership of just under 1 million barrels per day as well as about 14 billion barrels of potential resources in excess of what BP produces from its operations already.
Source: BP Investor Presentation
On top of that, there is immense upside potential having such a well established position in Russia. The Bazhenov shale formation is estimated to have 1.5 trillion barrels of oil in place, and offshore Arctic resources in Russia could be several hundred billion barrels of oil. So not only does BP have a little bit of an inside track when it comes to forming joint ventures with Rosneft, but it also gets close to a 20% cut from any joint venture that Rosneft signs with BP's peers.
The one downside to this large position with Russia is that it does carry some pretty sizable political risks. The less than warm relationship between the West and Russia might concern investors because there is the possibility that BP could lose that stake without warning, or--even worse--without adequate compensation.
What a Fool Believes
BP has been in a bit of an identity crisis over the past couple of years following the Macondo well blowout, but the moves that it has made appear to be putting the company on the right track. BP's focus on cash flow generation should be especially appealing to dividend investors. BP's shares already yield an impressive 4.4%, and management has plans to increase that dividend once it gets these more cash stable operations up and running. Keep in mind, though, that investing in BP is an investment for the long term, and those who are afraid to weather an oil price storm or two should probably stay away.
