Yes, we know that the general public is still sour on BP plc (NYSE:BP) more than two years after the Deepwater Horizon accident, and that investor sentiment towards the company remains poor as well. Its business also took a hit during the second quarter of 2012: production was down from the same period in 2011 (contributing to an 8% decline in revenue), the company took a number of writedowns, and adjusted profit was nearly wiped out.
The considerable interest in BP plc among value investors is quite notable, however. It was the largest position in the Baupost Group’s 13F portfolio at the end of June. Seth Klarman and his team increased their holdings of BP by 44% during the quarter to a total of 13.5 million shares (find more stock picks from Seth Klarman and the Baupost Group). BP was also a favorite of Kenneth Garschina’s Mason Capital Management, as the fund increased its own stake by 37% and closed June with 13.6 million shares in its portfolio (research more of Mason’s favorite stocks). A number of other funds and other major investors threw in the towel on BP, as the 56 13F filers who had reported a position in the stock at the end of March decreased to 41 three months later. However, it still held a place on our list of the ten most popular energy stocks among hedge funds (see the full rankings).
The funds which remain in the stock, including those which are increasing their position, are likely attracted to the fact that BP plc trades at only 8 times trailing earnings and 7 times forward earnings estimates. Many other oil supermajors are trading at fairly low multiples, but certainly in an absolute sense this seems like a rather low valuation for such a large company (its market cap is about $130 billion). When adding in its net debt, BP comes out to an enterprise value of $165 billion; given trailing results, the EV/EBITDA multiple is 4.6x- again, an appealing valuation of the business relative to its cash flow. BP also pays a dividend yield of 4.6%.
BP is best compared to other large oil companies such as Chevron Corporation (NYSE:CVX), Exxon Mobil Corporation (NYSE:XOM), ConocoPhillips (NYSE:COP), and TOTAL S.A. (NYSE:TOT). Chevron and Total both match BP at trailing P/E multiples of 8, with Chevron trading at 9 times forward earnings estimates and Total’s corresponding multiple being 7. Both of these companies’ earnings came in lower in the second quarter than in the same period in 2011, though their declines were not as sharp as BP’s. Chevron, in fact, had its net income fall by less than 10%. Given the fact that they also pay large dividend yields- Total’s is 5.0%, in fact- we think that they are better buys than BP as they appear more stable in terms of their business and trade at similar multiples.
Exxon Mobil, the largest of the publicly traded supermajors, carries a small premium relative to other oil companies. It trades at trailing and forward P/E multiples of 10 and 11, respectively. Exxon Mobil has good positioning in natural gas thanks to its acquisition of XTO Energy in 2010; with natural gas prices low, this might give the company a strong growth avenue as well. ConocoPhillips falls into the “struggling” category among oil companies: its stock price is down 18% in the last year, reflecting revenue and earnings numbers which have also fallen at double-digit rates. At a forward P/E of 10, it certainly seems less attractive than Exxon Mobil and we’re not sure it’s better than BP either.
BP does look cheap, in absolute terms, when looking at its multiples. However, particularly given the fact that its business has been doing poorly, it does not look like a good value relative to some other large oil companies.