BP: High-Quality Assets Pumping Out Growth And A 6.7% Dividend Yield

When most investors think of buying oil stocks, the U.S. majors like Exxon Mobil (XOM) and Chevron (CVX) typically come to mind.

And while Exxon Mobil and Chevron are both Dividend Aristocrats with great balance sheets, investors can earn significantly higher dividends by looking overseas. For example, U.K. based energy giant BP (BP) has a 6.7% dividend yield. This compares favorably to its peers such as Exxon Mobil and Chevron, which have dividend yields of 3.9% and 4.2%, respectively.

BP is one of 295 stocks with a 5%+ dividend yield. You can see the full list of established 5%+ yielding stocks by clicking here. Of course, a high dividend payout is only as good as the company’s underlying fundamentals. The past year has been extremely challenging for BP, and Big Oil more broadly, due to plunging oil and gas prices.

Fortunately, conditions are rapidly improving. BP will benefit from completion of several new projects this year, spending reductions, and rising oil and gas prices.

Business Overview

BP is a global integrated oil and gas major. Its integrated model means it has both the upstream (exploration and production) and downstream (refining and marketing) operating segments. BP also owns a nearly 20% investment stake in Russia-based energy producer Rosneft.

Integrated majors like BP, Exxon Mobil, and Chevron, benefit from diversified business models. When oil prices sink, as occurred in 2014-2015, the upstream businesses take a huge hit. Upstream activities are highly reliant on the price of oil. For example, BP’s upstream segment lost $937 million in 2015. The good news is, now that oil prices have recovered to $50 oil, BP’s upstream business has returned to profitability. Upstream operations turned in a $574 million profit in 2016.

BP Upstream

Source: 2016 Earnings Presentation, page 14

And, the benefit of the integrated model is that downstream activities tend to improve when oil prices crash. Falling oil prices helps reduce oil feedstock costs, which widens refining profit margins.