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Stock of the week: BP

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Graham Spooner, investment research analyst at The Share Centre, explains why oil giant BP is this week’s stock pick.

British multinational oil and gas company, BP, is this week’s stock of the week. Amid the recent oil price rally, the group has acquired the rewards from the fertile environment. According to BP’s management, the group enjoyed its best quarter since 2014 as underlying replacement cost profit rose by 71% to $2.6bn.

The group’s upstream division had its most impressive performance since the last time oil prices were above $100 a barrel as production increased to 3.7 million barrel of oil equivalent (BOE), an upsurge of 6% compared to the same period last year. Such success is on account of the increase in new projects and plant reliability.

Average realised oil prices of around $67 a barrel, much higher than in 2017, was also of major help. Investors should also acknowledge that in its refining business, the company seems to have done well too, while the industry as a whole is facing challenging conditions.

It is important to note that the share price has now surpassed the price of 2014 before the time when oil started its slide from $100 a barrel. This fact signifies the substantial changes made to the group through measures such as offloading low returning assets, cutting costs and capital expenditures.

Favourable conditions such as the improving demand for oil as the major global economies enjoy synchronised growth, significant new oil and gas finds, and the divergence from controversies such as the Deep Water Horizon disaster, have increased BP’s confidence about the future.

Consequently, major project investments have become a feature again; BP’s Atoll project in Egypt has started production during the last quarter and it has made final investment decisions on four other projects in Oman, India and the North Sea.

Fluctuating circumstances could prove to be challenging nevertheless; these investments will challenge the oil producer’s target of keeping its gearing ratio at between 20-30% and higher global production capacity could limit oil price rises and spikes.

The quarterly dividend yield has been maintained at 10c, giving investors an attractive yield in excess of 5%. With oil price hitting three-year highs and the group successful restructurings made, we maintain our ‘buy’ recommendation for BP for investors seeking a balanced return, willing to accept a low to medium level of risk.

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