British Petroleum (BP)

British Petroleum (BP) is likely a familiar name to you if you lived in the U.S. and turned on a television in the Spring/Summer of 2010.  More on that later.  BP has 3 main business segments:

Upstream - Oil and gas exploration and drilling

Midstream - Transportation and processing of oil and gas products

Downstream - Distribution of oil and gas products (i.e., gasoline, lubricants, etc.)

BP is a dividend play; however, it is not a "sleep at night" dividend play like some of the other higher yielding stocks.  BP faces many potential legal expenses/penalties for the Deepwater Horizon oil spill in 2010.  For this reason, the share price of BP is deflated, and the yield is typically in excess of 6%.  The legal proceedings have continued for a long time, but as they draw closer and closer to conclusion, the threat of penalties from the proceedings is moving to the back of investors' minds.  As such, BP may have a chance to appreciate in share price when unknowns pertaining to the penalties become realized.

BP, and the major oil and gas companies in general, has changed its focus from rapid expansion to investing in the highest-margin opportunities.  Consequently, BP is in the process of divesting the lower-margin opportunities to free up capital for better use.  The freed capital has been used to opportunistically reinvest in high-margin projects, repurchase BP shares, and increase dividends.

What to watch for: Oil prices.  Shocked?  BP has a renewed commitment to its balance sheet, which should allow BP to profit when oil prices are booming and maintain its dividend when oil prices are a "bust."  Low oil prices, assuming the integrity of BP's balance sheet is maintained, offer advantageous opportunities to accumulate BP shares at historically high yields.  In addition, the long-term growth prospects of oil companies is typically measured by new oil finds and oil reserves.

Common Cents Take: BP is a higher risk and, consequently, higher yield income play.  BP will fluctuate with the price of oil, which will undoubtedly ebb and flow over the long-term.  However, BP's commitment to its balance sheet will give investors confidence in accumulating higher yielding shares when oil prices, and thus BP's share price, drop.