When most investors think of buying oil stocks, the U.S. majors like Exxon Mobil (XOM) and Chevron (CVX) typically come to mind.

And while Exxon Mobil and Chevron are both Dividend Aristocrats with great balance sheets, investors can earn significantly higher dividends by looking overseas.

For example, U.K. based energy giant BP (BP) has a 6.6% dividend yield. This compares favorably to its peers such as Exxon Mobil and Chevron, which have dividend yields of 3.8% and 4.1%, respectively.

BP is one of 295 stocks with a 5%+ dividend yield.

You can see the full list of established 5%+ yielding stocks by clicking here.

Of course, a high dividend payout is only as good as the company’s underlying fundamentals.

The past year has been extremely challenging for BP, and Big Oil more broadly, due to plunging oil and gas prices.

Fortunately, conditions are rapidly improving. BP will benefit from completion of several new projects this year, spending reductions, and rising oil and gas prices.

Business Overview

BP is a global integrated oil and gas major. Its integrated model means it has both the upstream (exploration and production) and downstream (refining and marketing) operating segments.

BP also owns a nearly 20% investment stake in Russia-based energy producer Rosneft.

Integrated majors like BP, Exxon Mobil, and Chevron, benefit from diversified business models. When oil prices sink, as occurred in 2014-2015, the upstream businesses take a huge hit.

Upstream activities are highly reliant on the price of oil. For example, BP’s upstream segment lost $937 million in 2015.

The good news is, now that oil prices have recovered to $50 oil, BP’s upstream business has returned to profitability. Upstream operations turned in a $574 million profit in 2016.

Source: 2016 Earnings Presentation, page 14

And, the benefit of the integrated model is that downstream activities tend to improve when oil prices crash. Falling oil prices helps reduce oil feedstock costs, which widens refining profit margins.

BP’s downstream unit contributed $7.1 billion of net profit in 2015, followed by $5.1 billion of profit in 2016.

This is why most of the oil and gas companies that cut or eliminated their dividends over the past year were predominantly E&P companies that only have upstream operations. Integrated majors like BP, Exxon Mobil, and Chevron widely maintained their dividends, even at sub-$30 oil.

Another reason for BP’s return to profitability last year was cost cuts, along with asset sales.

BP reduced capital expenditures by $2.5 billion in 2016, and it divested $2.6 billion of assets deemed non-critical to the future direction of the company.

The company plans to continue reducing costs and selling off assets to raise additional cash. Along with production growth, these initiatives are the reason why BP expects cash flow to increase significantly in 2018.

This gives BP the ability to sustain its current dividend, with the opportunity for future dividend increases if oil prices rise up ahead.

Growth Prospects

BP has several catalysts for future growth, the most important of which moving forward is new projects.

BP has a total of seven major projects set for completion this year. One major project was completed in the first quarter, another in the second quarter, with two more nearing completion.

Together, BP’s new upstream projects are on track to provide 800,000 barrels per day of additional production by 2020. By 2021, BP expects total production to be 1 million barrels per day higher than it was in 2016.

Source: Q1 Earnings Presentation, page 15

And, BP has reported its new project lineup is 15% under budget so far.

Production is already growing. Last quarter, BP’s total group production increased 5% year over year.

At the same time, the company continues to cut costs. Upstream cost of production declined 13% last quarter, to $7.22 per barrel.

Plus, BP reduced capital expenditures by $1 billion in the first quarter, from $4.5 billion to $3.5 billion year over year.

The benefits of production growth aligned with cost efficiencies are already being felt. In the first quarter, BP’s adjusted operating cash flow was $4.4 billion, an increase of 47% from $3 billion in the same quarter last year.

Underlying net profit was $1.4 billion for the quarter, a huge improvement from the $485 million loss incurred in the first quarter of 2016. Improvements in the upstream segment had a lot to do with it, as BP benefited from significantly higher oil and gas prices.

Source: Q1 Earnings Presentation, page 8

The combination of rising production and lower production costs should give BP a huge boost.

The company expects cash flow to increase significantly over the second half of the year, which sets it up very well to benefit from rising oil prices in 2018 and beyond.

As was the case last year, 2017 will be another year of asset sales and capital discipline. Divestment proceeds are expected to total $4.5 billion-$5.5 billion this year.

Organic capital expenditures are projected at $15 billion-$17 billion for 2017, compared with $19.5 billion in 2015.

Lastly, BP will benefit from lower payments from the Deepwater Horizon spill in 2010. Management expects cash outlays from the settlement to be $4.5 billion-$5.5 billion in 2017. From then on, cash payments are expected to drop to $2 billion in 2018, and fall further to $1 billion per year in 2019.

Higher production and improved efficiency has allowed BP to cover its dividend with operating cash flow, with room for future dividend growth as cash flow grows moving forward.

Dividend Analysis

BP currently has a dividend payout of $2.40 per share. The company did not cover the dividend with earnings-per-share last year, but the dividend is covered by cash flow.

Operating cash flow is the metric most integrated oil and gas companies scrutinize when making dividend decisions. As BP expects future cash flow to increase, it leaves room for potential dividend increases in 2018 and thereafter.

Source: Q1 Earnings Presentation, page 14

BP’s cash breakeven point is now down to $35-$40 per barrel. As long as oil stays above this level, BP will be significantly cash-flow positive.

Investors should also be reassured by the fact that BP management has reiterated its position that the dividend is the top priority within the financial framework.

Oil prices would have to sink back to below $30, and stay there for a prolonged period of time, for BP to consider cutting its dividend.

Final Thoughts

BP has come a long way over the past several years. In that time, it has had to deal with tens of billions in financial penalties from the 2010 oil spill, as well as the huge decline in commodity prices.

But, thanks to asset sales and cost cuts, BP’s dividend appears to be secure.

There is also potential for its dividend to grow, if oil continues to rally, thanks to its huge lineup of new projects.

As a result, investors should view BP favorably as a high-yield dividend stock.