Why a share of BP plc could be the buy of the decade
If there were only one stock I could buy and hold for the next decade, I would buy BP(LSE: BP) as, over the next 10 years, the company is set to draw a line under the Gulf of Mexico disaster and benefit from rising oil prices. These factors will, in my opinion, make it one of the best-performing stocks in the FTSE 100 between now and 2028 as it invests cash flow from operations back into the business and returns excess funds to investors.
What I'm excited about is how much money BP stands to make over the next few years as its efforts to slash costs across the business begin to pay off.
Indeed, when the oil price downturn began in 2014, BP's break-even price for producing one barrel was around $90, meaning that the business quickly became uneconomic when the price crashed below $40. However, management acted fast to cut costs below and beyond what was needed to be profitable with the break-even point falling 40% to $47 per barrel during the first quarter of 2017. Further operating synergies are expected to be achieved in the years ahead driving the break-even point "into the $30s".
These cost reduction efforts helped the company report an increase in underlying full-year profit of 139% for 2017. Meanwhile, full-year operating cash flow rose by 37% from 2016. Unfortunately, the group is still paying out for its part in the Gulf of Mexico oil spill and this cost it $5.2bn for 2017, but the cash cost is expected to fall to $3bn for 2018, freeing up $2.2bn of cash for shareholder returns. At the same time, BP is planning to cut capital spending further from the level of $16.5bn reported for 2017.
BP generated $24.1bn in cash from operations last year, a year in which the price of Brent crude averaged $54.30 per barrel. So far this year, the price of Brent has averaged $69.10 per barrel indicating to me that not only is the group likely to repeat last year's performance for 2018 but generate substantially more cash from operations.
City analysts are currently expecting the firm to report earnings per share of 31.5p for 2018, up around 10% year-on-year, although over the past few months analysts have been revising their estimates for growth higher and I would not rule out further upward revisions as the year progresses.
And in the years ahead, profits should continue to grow as the business drives forward with its five-year plan to increase production. For example, the company recently announced its intention to double production at its North Sea operations to 200,000 barrels per day by 2020.
As profits and cash flows continue to grow, I believe BP will look to return billions in unneeded funds to investors. The shares already support a dividend yield of 6%, and towards the end of last year, management announced a $1.6bn share buyback as an initial taste of what's to come.
So overall, as the price of oil stabilises and BP benefits from its cost-cutting efforts, as well as falling capital expenditure and an end to Gulf of Mexico payouts, the company looks set to generate tremendous returns for shareholders over the next decade.
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Rupert Hargreaves does not own any share mentioned. The Motley Fool UK has recommended BP. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.