Pre-market trading March 22 saw shares of BP (NYSE:BP) up almost 3% on news it was embarking on an 18 month share repurchase program that will see the UK oil company buyback $8 billion of its stock using some of the proceeds from the sale of its 50% interest in TNK-BP. BP's Russian investment continues to pay dividends, figuratively and literally. Does the buyback make its stock more attractive? I'll have a look.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

What BP Gets
Doing business in Russia is still very much like the Wild West; it's volatile and unpredictable. Selling its 50% stake in TNK-BP to Rosneft (OTC:OJSCY) for $12.5 billion in cash and a 19.75% interest in the country's largest oil company gives it six years of dividends up front that it would have received from TNK-BP. More importantly, it allows BP to extricate itself from a situation that's increasingly become rife with government intervention while still owning a significant piece of the Russian oil industry. Mr. Putin, whose government owns 75% of Rosneft, gets ultimate control of more than 50% of Russia's oil output while also making it the world's largest oil producer ahead of Exxon Mobil (NYSE:XOM).

Whether BP got a good deal or not is going to take years to determine. Like all acquisitions, unanticipated events occur after the fact that completely change the complexion of a deal. We do know that BP invested $8 billion in TNK-BP back in 2003 and has since received $19 billion in dividends. The cash-and-share deal with Rosneft is valued at $27 billion giving BP an estimated return on investment of 475% in just a decade. What happens in the future dictates whether its Russian foray has been a solid triple or an in-the-park home run.

SEE: Biggest Merger And Acquisition Disasters

The $8 Billion Repurchase
Forbes contributor Abram Brown did a quick assessment of BP's valuation on its website March 22. Brown came to the conclusion that BP's stock is currently more expensive on a price-to-earnings (P/E) basis than all four of its major peers. At 11.3 times trailing earnings it's almost 50% more expensive than Royal Dutch Shell (NYSE:RDS.A, RDS.B). However, he rightly points out that it's 37% cheaper than the S&P 500.

Where I believe he takes a wrong turn is implying that because BP's stock is currently trading below its 52-week average and Fact Set data exists suggesting companies buying back their stock at prices below their 52-week average tend to outperform those who haven't by 18.6 percentage points, that BP's stock is worth buying at current prices. That's simply not the case. BP has yet to repurchase any of its shares. We have no idea what the high, low and average price of its stock over the next 18 months is going to be. As each quarter passes investors will get an idea how well the company is executing its buyback, but that's in hindsight only.

The conventional wisdom that companies buyback stock when it's cheap has long ago been proven false. CFO's and CEO's are no better at assessing the intrinsic value of their stocks than us regular folk. If that weren't the case, Warren Buffett would have bought back his Class A stock in March 2009 when Berkshire Hathaway (NYSE:BRK.A, BRK.B) was trading at $70,000 (one times book value), half its current price.

SEE: What Is Warren Buffett’s Investing Style?

Share Repurchase Track Record
BP last repurchased its shares in 2008 when it bought back $2.9 billion of its stock at an average price of $64.49 per share. During 2008, its 52-week average trading price was $57.63, 10.6% less than what it paid to buy back its stock. In nine years from 2000 through the end of 2008 it repurchased $51.1 billion of its shares at an average price of $62.20 per share. BP's highest price in those nine years was $79.77 in November 2007; its lowest price was $34.67 in January 2003 and its average trading price was $57.22, about 8% less than what it paid to buy back its stock. At best, BP is mediocre at repurchasing its shares.

Bottom Line
Chances are good that the mere act of buying back its stock will increase its share price over the next 12-18 months. That's because BP has a history of overpaying for its stock. In essence it's bidding with itself in an effort to buy its stock. So, do I think BP's stock is more attractive given the buyback? 

Just the opposite. 

What would impress me is if BP announced an $8 billion investment like the one back in 2003. That was real decision making. This is just plain lazy. I'd pass on its stock.

Related Articles
  1. Trading Strategies

    Key Ratios For Analyzing Oil And Gas Stocks

    Oil and gas investors need to focus on a different subset of ratios to analyze the growth and profitability of these companies.
  2. Trading Strategies

    Guide To Oil And Gas Plays In North America

    Oil and gas shales in North America have been known for decades, but most investors don’t know it exists, or what is produced.
  3. Mutual Funds & ETFs

    Investing In Oil And Gas UITs

    Unit investment trusts provide direct exposure to the energy sector, fueling better returns.
  4. Fundamental Analysis

    5 Biggest Risks Faced By Oil And Gas Companies

    Before investing in gas and oil stocks, consider such factors as political and geological risks.
  5. Investing

    5 Common Trading Multiples Used In Oil And Gas Valuation

    Before you decide to invest in oil and gas, you should understand these multiples.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Investing News

    U.S. Stock Markets Rebound

    After a string of losses in the past week amid declining oil prices, economic slowdown in China, U.S. and timing uncertainty interest rates hike by Fed, US Stock markets came back with a bang ...
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
RELATED TERMS
  1. P5+1

    The P5+1 is a group of world powers who have been negotiating ...
  2. Control Of Well Insurance

    Insurance that provides coverage to companies operating a well ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
  6. Groundwater

    Water that is found underground rather than on the surface.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!