Exxon Mobil Corporation (XOM): Is BP plc (ADR) (BP) a Buy After the $8 Billion Buyback Announcement?

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BP plc (ADR) (NYSE:BP)’s shareholders should get excited again, as the company intends to return around $8 billion in cash to its shareholders in the next 12-18 months in a form of share buybacks. The share repurchase announcement was made after it had traded its 50% stake in its Russian business TNK-BP to Rosneft for $12.5 billion in cash and a 18.5% stake in Rosneft. In the past twelve months, BP has lost more than 9.2% of its total market value to land at around $42 per share. Is BP a buy after the deal with Rosneft and the stock repurchase plan? Let’s find out.

BP To Pay Massive Fine, More To Come

Sluggish share performance since Gulf of Mexico crisis

BP plc (ADR) (NYSE:BP)’s share price has been sluggish since the oil spill crisis in the Gulf of Mexico. In April 2010, BP’s stock dropped significantly from nearly $60 per share to only $27 per share, and it has stayed in the range of $37 – $44 since the beginning of 2011. BP has estimated that it would take around $40 billion to clean up the mess in the Gulf. According to BP plc (ADR) (NYSE:BP), it has paid out $10.43 billion in claims to individuals, businesses and the government. I think BP could meet the claims quite comfortably, as it kept generating consistent positive cash flow. In 2010, its operating cash flow was pushed down to the lowest level at $13.6 billion. In 2012, BP’s operating cash flow was around $20.4 billion.

The TNK-BP deal would give BP a lot of financial flexibility

Shareholders of the British oil giant should be happy after BP plc (ADR) (NYSE:BP) completes its major restructure in its Russian oil business with Rosneft. After the deal, BP will receive around $12.5 billion in cash, including about $710 million in dividends from TNK-BP, and an 18.5% stake in Rosneft. Thus, combined with the existing 1.25% stake, BP would own a 19.75% interest in Rosneft. According to the company’s recent press release on March 22, the $8 billion share repurchase is equivalent to the total investment outlay that BP invested in TNK-BP in 2003.

Highest dividend yield

In the end of 2012, BP had the total proved reserves of 17 billion BOE, while Exxon Mobil Corporation (NYSE:XOM)’s proved reserves were around 25.2 billion BOE. Chevron Corporation (NYSE:CVX) had the smallest proved reserves among the three, at around 11.35 billion BOE.

At $42 per share, BP is worth around $133.8 billion. The market values BP at only 5.74 times EV/EBITDA. However, BP has the most expensive valuation among the three. Chevron is trading around $120 per share, with a total market cap of $233.4 billion. It is valued even cheaper than BP on the market, at only 4.66 times EV/EBITDA. Exxon Mobil Corporation (NYSE:XOM) is the largest oil company among the three, with $398.8 billion in total market cap. At $89 per share, it is valued at 5.48 times EV/EBITDA.

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