BP plc (ADR) (BP) Stock Is a Deep Value Dividend Play

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There were few stocks that were more radioactive at one point that BP plc (ADR) (NYSE: BP ). Sure, financial stocks of all stripes were in the doghouse for quite some time during the financial crisis. But when the Deepwater Horizon blew up, it also blew a hole in BP stock for a very long time. (See the movie, by the way, if you want a great account of what happened).

Despite Missteps, BP Plc (ADR) (BP) Stock Can Still Deliver the Goods

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Having a multibillion-dollar overhang on a company for years is a sure way to scare investors off a stock, and cripple a company's operations.

BP stock is still paying the price. The company had to fork over another $7.1 billion in pre-tax payments last year, bringing the total to $62.6 billion.

It's hard to believe BP is still in business, and that shares aren't at zero.

It takes some tugging and pulling to figure out what the operational results for BP have been, because earnings releases have to cover a lot of ground in terms of one-time adjustments and Deepwater Horizon payments. Yet when you do, there are some encouraging signs, enough to consider that BP may be a long-term deep value play.

BP Results

Revenues were encouraging, and we don't have to strip out other stuff to find that it increased from $49.2 billion to $52.1 billion. That's a 6% increase, and just think about that - over $50 billion in revenue in just one quarter. If you're wondering how BP can stay in business despite the disaster … well, that's how.

Backing out one-time adjustments, BP stock made $400 million in the quarter, which was an improvement on the nearly $200 million loss from the previous quarter. What's particularly significant about the profit it generated was that some of it came from its upstream producing, which was a welcome change after losses there over quite some time.

On the downstream side, which is essentially stuff that is refined from oil, there were sizable gains. Now, the downstream reporting looks worse because margins on the refining side were a bit weaker and there was a ton of money thrown at fixing up a big refinery.

That, by the way, is one reason I don't like to value big oil companies on a price-to-earnings basis. These one-time and ongoing adjustments don't make that a feasible approach.

BP has one thing going for it that the other big U.S. producers do not: It has already started to generate revenue from its 20% stake in the Russian producer/explorer Rosneft (OTCMKTS: OJSCY ). Remember, BP is short for British Petroleum, and the Brits aren't hampered by sanctions against Russia the way America is. BP chugged out $135 million in EBIT from the operation.

Brent crude prices averaged $49 per barrel in the quarter, which was up from $45 the prior year. However, management says there is still work to be done in terms of oil prices. It said BP needs oil to stabilize at $60 for the company to break-even, that inventory seemed to start to decline a bit, and that OPEC needed to stick with its promised cuts.

BP Stock: Value, Or …?

So, the question is whether or not BP stock is a deep value play here. I think it may be.

For starters, though, I suggest that energy have some place in any long-term diversified portfolio. You should have a major oil producer/explorer in there.

I value big oil companies like these on an EV-to-EBITDA ratio, since it accounts for what are really the two biggest parts of these kinds of companies: cash flow and debt. BP's ratio sits at 9.4 right now. By comparison, Exxon Mobil Corporation (NYSE: XOM ) is at 14.3, Chevron Corporation (NYSE: CVX ) is at 17.8, Royal Dutch Shell plc (NYSE: RDS.A ) is at 10.7, and ConocoPhillips (NYSE: COP ) is at 17.

So it's obviously less expensive because of its struggles, but it's also much cheaper than it was even after it recovered from the disaster low of $28. Moreover, it yields 7% at current prices - and while it doesn't look like the most secure payout, BP did keep from cutting it through the worst of the oil price drop, so it looks to be in the clear.

BP stock did get back over $50 at one point, so buying it here at $34 seems like a decent long-term risk-reward scenario.

Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years' experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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