BP (BP) is currently one of the world’s most attractively priced oil supermajors. The company currently sports a 6.8% dividend yield and is strategically positioning itself to survive and thrive in a world of lower oil prices by improving its cost structure, reducing capital expenditures, making strategic growth and diversification investments, and settling outstanding oil spill-related expenses.

BP is one of the largest oil and gas corporations in the world based on its $123 billion market cap. It is a fully integrated company and operates in two segments: upstream and downstream. While the company has gone through significant challenges due to a major oil spill in 2010 that has cost it $65 billion so far, the worst appears to be behind it.

Recent Earnings Report

Second-quarter results revealed flat year over year earnings performance, which was actually impressive given that oil and gas prices have fallen meaningfully during that time frame. This was due to a 6.5% production volume growth in its upstream business. The company invested heavily in an all-cash acquisition of BHP assets and as a result, did not grow its dividend payout during the quarter and kept share buybacks to a minimum.

Despite this acquisition, BP’s balance sheet and dividend safety remain solid as it is projecting $4 billion to $5 billion of proceeds from dispositions this year. This, in turn, will give it the resources needed to accelerate share buybacks, which in turn will improve its dividend safety and growth prospects by lowering its payout ratio.

Looking ahead, the company should also be facing reduced overhang from its Deepwater Horizon accident as it has spread its $23 billion remaining bill over the next 17 years. Furthermore, the company is aggressively improving its cost structure as it can now cover its dividend at $55 a barrel and expects to be able to do so at $50 a barrel in the next few years. This is thanks in large part to cutting its costs by 20% from 2014. Capital expenditures have also fallen to only about 60% of what they were back in 2013 even as it continues to grow production, with expectations of achieving 800,000 barrels of additional oil production capacity by 2020. This new production should also have margins that are more than a third greater than current portfolio averages, meaning that the company’s productivity and minimal oil price threshold should improve substantially in the near future.

That being said, BP still faces substantial risks as its cash flow is highly dependent on commodity pricing, which are entirely out of the company’s control and highly dependent on macro-economic and geopolitical events. This not only makes its current cash flows volatile, but it also makes long-term projections on major growth projects highly uncertain and can lead to significant misallocation of capital. The company also faces enormous operation execution risk in both its current operations as well as its exploration and development projects. This has come into play in the past as the company has taken on substantial losses from environmental spills and failed projects. The company also faces significant risk due to the potential for new regulations to be enacted that will target fossil fuels in favor of greener energies and the environmental movement. Finally, BP has exposure to Russia’s national oil company through its 20% interest in Rosneft, which gives it even greater geopolitical risk than some peers.

Final Thoughts

Despite these risks, we view BP as a good value at current prices. In addition to its fairly safe 6.8% dividend yield, we expect the company’s aggressive buyback program and growth development projects to lead to 5% annualized earnings-per-share growth over the next half-decade. We also see shares as undervalued by about one-sixth at present. Combining all three elements should generate low to mid-teen annualized total returns over the next half-decade. While the risks are substantial, we view the potential rewards as worth the risk for aggressive income investors.