BP looks good - but this stock looks even better
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Associate Editor
David Stevenson Sep 04, 2009
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It's painful filling up the car these days.
After a brief period of respite, petrol and diesel prices are climbing again. With another 2p a litre in extra fuel duty being siphoned off since the start of this month by Alistair Darling, you're probably paying at least 105p a litre at the pump - the highest for ten months.
Of course, high petrol prices are good news for oil companies. And BP, our second-largest oil and gas producer, must feel particularly buoyant just now, as it's just hit the jackpot with a "giant" oil find. So you could offset your petrol bill pain by buying BP shares, if you don't already have them.
But there might be an even better energy-related play out there...
What you can do to benefit from higher petrol prices
Apparently, there are lots of angry motorists around right now, according to the news channels. It's partly down to the recent oil price rise, but the real rage is directed at the government for slapping on its latest 2p-a-litre fuel duty hike. This means that some two-thirds of the cost of what you're pouring into the tank is flowing to the UK Treasury.
For my part, I can't say I've seen much forecourt fury lately, just resigned acceptance that there's little one can do about higher petrol prices. But you can do something – buy shares in the companies benefiting from higher oil prices.
BP in particular looks interesting. We've been keen on the stock for a long time, largely due to its decent dividend yield which is likely to be above 6.5% this year. So for now, we've no reason to change our view that this is a stock worth holding.
And its latest discovery of a "giant" oil find in the Gulf of Mexico – its second major recent find - has to be good news long-term, as it will help the group keep its production going far into the future. BP reckons the new Gulf of Mexico reserves might be even bigger than the Forties field, the largest on the UK side of the North Sea. At its mid-1980s peak, this was delivering 500,000 barrels a day – almost 1% of the entire world's production at the time.
But don't get over-excited. The 'Tiber Prospect' discovery is in one of the most inaccessible places on the planet. It's 250 miles from land, and was found by sinking a drill almost 1,300 metres - the height of Ben Nevis - to the seabed, then boring another 9,400 metres (equal to Mount Everest) into the earth's crust.
So it won't be cheap to get out of the ground. And as Tony Shepard at Charles Stanley points out, "a big find like this doesn't come to market for at least five years". In the meantime, BP's "earnings are under pressure because of the lower oil price".
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There's only one way the oil price is headed - down
That may sound odd as you look at your rising fuel bills, but you have to remember that despite its recovery from the lows at the end of last year, crude oil is still at less than half its mid-2008 level.
What's more, as we pointed out in the magazine three months ago (Profit as oil spikes, slumps, then takes off again), we reckon the oil price has been buoyed by a mix of speculation and Chinese stockpiling rather than 'real' demand. In other words, there's no real world economic recovery underway. And as we said yesterday in Money Morning (Why company analysts are completely wrong about the rebound), we don't think that the current – apparent – rebound in activity will last.
If there's a big 'double dip' in the global economy, there's only one way the oil price is heading – and it's not up.
Further, BP's share price has rebounded by around a third from its March 2009 lows. We certainly wouldn't put you off holding any shares you've got. And a 6.5% dividend yield makes the shares an attractive buy for income-seekers. But with oil prices now at around $67 a barrel, if you're happy to take the risk of waiting, we'd prefer to pick up the stock a bit lower down.
And just a word of warning. If the oil price were to slide very sharply, there has to be a risk that BP won't be able to maintain its dividend payments at the current level. That would be because the company's cash flow wouldn't be enough to fund both the dividend and also the capital spending needed to get more oil out of the ground.
BP boss Tony Hayward reckons this won't happen – and his job is probably on the line if it does. After all, BP accounts for a huge proportion of the total dividends paid out by FTSE 100 stocks, so there'd be a lot of fund managers calling for his head. But we'll be watching the cost of crude – and its impact on BP's dividend prospects – closely.
A more secure alternative to BP
A decent alternative to BP – with a slightly more secure-looking dividend – is GDF Suez (FP: GSZ), the second largest electricity generator in France. 70% of the group's French electricity production comes from renewables such as hydroelectricity and wind power. It is also the country's number one natural gas supplier. In fact, Suez's global power distribution operations mean that it's actually the world's second biggest utility.
It's slightly more expensive than BP on 11.8x next year's earnings, according to City forecasts, with a forward yield of almost 5.7%. But the dividend is currently almost three times covered by cash flow, compared with 2.2 times for BP, which makes it that bit more secure. Further, the company reckons it can grow the dividend by between 10-15% a year.
Citigroup Capital Markets rates GDF Suez at €29 as its top pick in France, and reckons the firm's profits will grow fast enough to push the share price up 30% within the next 12 months. Even if the performance turns out to be less good, that yield should provide some decent solace.
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