Analysis: BHP BP SLB

After you receive this alert, we will be initiating a position in British oil giant BP (BP) , buying 1,200 shares at roughly $46.96 each. Following the trade, BP will represent 1.99% of the portfolio.

We're calling BP up just one day after we added it to the bullpen, which we wrote about here. To understand why we like this stock -- especially during this period of rising commodity prices -- we encourage members to read through that alert and management's 2018 strategy update.

Now, rising oil prices aren't in and of themselves enough of a reason to buy an energy name. Instead, it's imperative to know what future production looks like over the longer term.

Well, we know per recent comments from Schlumberger (SLB) that the world is underinvested in production, and we think companies that have long-term projects already in place will be the ones that best capitalize on higher energy prices. That's why we appreciate BP management's visible trajectory toward a stated 900,000-barrel-per-day production target by 2021.

As for the downstream, we refer back to an RBC Capital note that we discussed in Monday's alert. As we wrote: "One reason why [RBC Capital analysts] like BP is for the widening spread between U.S. crude and Canadian heavy crude (WCS). According to the RBC analysts, BP's largest U.S. refinery sources the majority of its crude from Canada, and they said that the current discount in WCS to U.S. crude is 'particularly positive for BP relative to peers given its refining footprint.' They think this widespread dynamic will remain to the benefit of BP until new oil-export pipeline capacity comes online."

BP is on the hunt to augment the company's reserves as well. Reuters has reported that the firm is in the lead to acquire the U.S. onshore shale-oil and gas assets (including those in the Permian Basin) of BHP Billiton (BHP) .

The Permian remains one of America's hottest areas for energy production despite concerns about bottlenecks. It will become even more valuable once more capacity comes on line in 2019, and we're not that far away from that.

And then there's BP's income, which is the icing on the cake. The stock's 5% dividend yield is very attractive in this volatile market, as it represents a stable stream of money coming back to shareholders. And although liabilities surrounding the horrific 2010 Deepwater Horizon oil spill means there's uncertainty about how much cash BP will have to pay out, we think the risks are well managed given the number of claims remaining.

So, we're initiating our BP position with a $54 price target, which represents roughly 15.5x consensus 2019 earnings. We believe there's room for the stock to rise toward this level if cash flows increase as a result of even higher energy prices.