On 2010, British Petroleum (NYSE:BP) was responsible for what was considered the largest accidental oil spill in the history of petroleum industry. On April 20, the company’s Deepwater Horizon oil rig, located in the Gulf of Mexico, exploded and sank. Eleven lives were lost, and a sea-floor oil gusher floated for 87 days.
BP was then obliged to pay a series of liabilities on account of the US Department of Justice. This is why the last years have been difficult for the petrol giant, which was forced to sell almost $40 billion of its assets and materially shorten cash flows as well as oil and gas reserves.
But 2014 should bring some changes. The last trial’s briefings were in favor of BP. Payments to parties with no actual injury traceable to the spill were suspended and approximately $400 million in charges pending greater clarity were reversed. The company seems to be leaving the Gulf of Mexico disaster behind. But, is it a worthy investment?
The company now owns a big equity stake in Rosneft, Russian top’s oil firm. This is good news because BP’s Russian reserves have increased and the potential resources that Rosneft controls in Russia are truly enormous. But it also means that BP is now less exposed to Russia than it was with its previous ownership of TNK-BP. Russia now accounts for less than 10% of the business and BP has now a ‘cleaner’ balance sheet.
In fact, BP now has a new strategy on behalf of its portfolio (Zacks). It’s selling its non-core upstream properties, aiming for a smaller but more efficient base. The refineries in Carson, California and Texas City, which hold half of its US capacity, have already been sold, while the most competitive ones were retained. This will improve BP’s performance and returns.
This doesn’t mean we are not taking into account Macondo’s liabilities, which do remain uncertain. But we consider that BP seems well prepared to handle next payments.
Every petroleum company is facing the challenge of replacing reserves. Even if there’s a lot of petroleum left in the world, finding low-cost barrels is becoming very difficult. On this matter, BP benefits from owing high-quality production assets and having skills and expertise developed through decades of exploration and production. Its financial influence offers opportunities other oil and gas producers can’t pursue.
The company, however, remains highly leveraged by the price of oil, and relies on the ability of OPEC to maintain a floor on oil prices. Facing Macondo liabilities will only be possible if oil prices are maintained.
This risk, which all oil companies can face, lowers BP equity prices. BP has a P/E ratio of 6.2, significantly below the Integrated Oil & Gas industry median of 11. And new discoveries, projects and exploration wells lead us to think there is a good chance production and operation cash flow will begin to grow.
|BP||Chevron (NYSE:CVX)||Exxon Mobil (NYSE:XOM)|
|5yr EPS Growth Estimate (average , per annum)||-0.5%-3%||7%||10%-11%|
|Operating Margin %||5.1||19.2||16.3|
Despite BP´s profitability, figures do not look as attractive as those of its peers; its valuation and a dividend yield of more than 4.8% of the stock price make it an attractive investment opportunity. Evidently hedge funds have noticed this, as bullish sentiment increased over the past quarter. Prominent investors like Charles Brandes, Richard Snow and Richard Pzena upper their stakes in the company lately. Trailing this decision could certainly provide a decent upside over the long term, and generous dividends while waiting for the actual upside.
In addition, you should consider taking a close look at Schlumberger Limited (NYSE:SLB) — last quarter’s favorite among hedge funds — and Anadarko Petroleum Corporation (NYSE:APC), Occidental Petroleum Corporation (NYSE:OXY) and Hess Corp. (NYSE:HES), the second runners.
Disclosure: Vanina Egea holds no position in any stocks mentioned.