BP Is In The Best Position To Capitalize In Russia
BP is the second-largest shareholder in Russian oil giant Rosneft, after the Russian government. BP owns 19.75% of the largest Russian oil company after Rosneft bought BP’s stake in TNK-BP. BP has long had a contentious relationship with its Russian partners in TNK-BP, but now that it is aligned with Rosneft, BP’s future in Russia looks much brighter. Rosneft produces 4.5 million barrels a day. BP hopes to increase that output further with its technological expertise and management know-how.
First on BP’s agenda with Rosneft will be to explore the Arctic. The Barents Sea has enormous potential for hydrocarbon development and BP has been working to explore the region for years. Rosneft CEO Igor Sechin has said:
We intend in the near future to draft documents and will offer our partners at BP to look at blocks in the Barents Sea. I believe that the Barents Sea is the most prospective zone for work with BP.
Competitors
In looking at two other Supermajors, Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX), we see how they stack up against BP.
| BP | Chevron (NYSE:CVX) | ExxonMobil | |
| Market cap | $137B | $239B | $408B |
| Revenue (TTM) | $374B | $217B | $413B |
| P/E | 6.05 | 9.33 | 9.33 |
| PEG ratio | 1.73 | 6.28 | 6.23 |
| Price to sales | 0.37 | 1.10 | 0.99 |
In comparing these three Supermajors, we see that BP is undervalued compared to Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM). BP has a lower P/E, PEG Ratio and is cheap on a P/S basis. Chevron has one of the top project pipelines in the industry, targeting volume growth of 20% by 2017, which is more than the rate of growth from 2003 to 2010.
Management has been making key strides in re-balancing Chevron’s asset portfolio by divesting non-core and high-cost assets, this includes its decision to sell its marketing businesses in Kenya, Nigeria, Uganda, Western Africa and Brazil. Chevron also has plans to concentrate on the higher-margin discovery of oil and gas business. Billionaire Ken Fisher of Fisher Asset Management was the top hedge fund owner by shares going into 2013 (check out Fisher’s top picks).
Exxon is the world’s largest publicly traded oil company. What’s more is that over 83% of Exxon’s earnings come from its operations outside the U.S. The company operates on all sides of the oil business, with three segments: upstream, downstream, and chemicals.
Exxon’s free cash flow generation is impressive. The is consistently returning it to shareholders and increased its dividend in April 2013 to an annualized $2.52 per share, up 10.5% sequentially. The company also has a solid share buyback program in place, repurchasing 63 million shares during the first quarter. However, Exxon did cut its buyback rate by 20%, going forward.
One of Exxon’s key strengths is its balanced operations. Although natural gas prices have collapsed of late, Exxon expects unconventional gas to be a dominant fuel in the future. The company possesses more than 8 million unconventional acres in North America. Exxon has billionaire Bill Gates as its top hedge fund owner going into 2013 via his Gates Foundation (check out Gates latest stock picks).
The main reason for the BP discount is the ongoing litigation in the U.S. over the 2010 Deepwater Horizon accident. The final bill has yet to be determined for BP, and that is currently playing out in a Louisiana Federal Courthouse. Investors should not be too concerned as BP has shored up its balance sheet to pay for these contingencies. The company has $28.28 billion in cash on the balance sheet. The costs will be large, but BP has the financial strength to handle even the worst case scenario.
Final Assessment
BP will likely resolve the Gulf of Mexico accident within the next year. Seasoned value investors aren’t waiting and have been buying the stock. With a dividend yield of 5.00% and the company’s prospects in Russia, I think BP is the one Supermajor to own and offers the most upside potential.
Chevron and Exxon are both solid oil and gas investments, but those companies’ dividend yields are not as impressive as BP’s, and I think both are already fairly valued. Once BP resolves all litigation, look for a significant gain in the company’s shares and for the stock to trade closer to its peers in terms of P/E and Price/Sales.
The article Why Does Billionaire Value Investor Seth Klarman Own This Supermajor? originally appeared on Fool.com.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Chevron. Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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