The energy sector has been in a rut for a while now. Despite some decent one-off performances, energy screens as one of the worst performers over the year-to-date, one-year, three-year, and five-year periods. With that sort of performance, it's not altogether surprising that many of the majors (Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), et al) look a little undervalued. BP (NYSE:BP) actually jumps out as one of the potentially cheapest names to consider, but there's still quite a bit of work that management has to do to get this one performing again.

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Q1 Results Not As Good As They Seem, But Still Pretty Good

BP's first quarter earnings were interesting, maybe not so much for the actual numbers as for how analysts interpreted and presented them. Bullish analysts pointed to strong outperformance as a sign that the Street continues to undervalue and underestimate what BP can do, while bearish analysts dutifully stripped out a long list of non-operating factors that inflated results and pointed to weak current performance numbers in terms of the company's asset base.

On an adjusted basis, BP reported that EBIT was flat from the year-ago period and up 45% sequentially. At first glance, that looks like a beat of almost one-third relative to analyst expectations. As the bears noted, though, almost half of the improvement was due to seasonal expense factors, and the company's volume mix and gas trading results figured heavily. Strip those out, and the beat was about 12% relative to expectations – which I still consider to be a pretty strong result.

Income from upstream production fell 11% from last year, but rose more than 30% sequentially. On a per-BOE basis, that works out to about $19, which puts BP ahead of Exxon (almost $18/boe) and behind Chevron (almost $25/boe) in terms of upstream profitability. Income from refining and marketing jumped 78% and 18%, with the refining margin up 66% and 28%.

Turning to production, BP saw its own volumes fall about 5% from the year-ago period and rise about 2% sequentially, while total upstream production fell 4% and rose 1%, respectively. Realizations were pretty solid, with double-digit improvements in gas prices.

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Other Numbers Not So Good Today, But Will They Be Better Tomorrow?

Looking at some of BP's other numbers, the news wasn't as good. The company's consolidated organic reserve replacement for 2012 was negative 5%, and that sort of number does not get the job done. Likewise, the finding and development cost rose to over $21 per BOE for 2011.

These aren't great numbers, but then remember that BP is coming off of a very turbulent time where the company had to quickly sell assets and restructure its operations in the wake of the Gulf of Mexico Macondo disaster and the resulting costs, claims, and fines. With several high-profile, high-potential projects coming on line in areas like Angola, Azerbaijan, the Gulf of Mexico, the North Sea, and Trinidad, the statistics should get better in the coming years. While BP's production growth isn't likely to outpace other majors (at least not by all that much), the new production should carry higher margins with its heavier bias towards oil and lower infrastructure costs.

It's not all smooth sailing form here, though. For starters, the Macondo issue is still not resolved, and the company's liability could shift by billions depending on court proceedings. What's more, while many analysts have been enthusiastic about the company's investment stake in, and relationship with, Rosneft, I think getting too optimistic about any Russian partnership is a risky move given what we've seen happen over the last 10 or 15 years.

The Bottom Line

I'm not averse to riskier energy investment ideas, particularly those where the analyst community is largely skeptical (I own Statoil (NYSE:STO) in my own account). To that end, I acknowledge the possibility that BP could disappoint, but I think the stock's valuation more than covers that risk.

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While I give Exxon a 5x multiple to its forward 12-month EBITDA and Chevron a 4.5x multiple, I give BP only a 4x multiple. On the basis of expected forward EBITDA that works out to a fair value of about $49 today – making BP look like one of the cheapest majors out there. Even if I cut off the high-end EBITDA estimates, the target still comes out to $46. Coupled with a current yield of about 5%, I think BP is a worthwhile stock to consider for investors who are willing to go down a notch or two from Chevron and Exxon in terms of quality and security.

At the time of writing, Stephen D. Simpson owned shares of Statoil.