The British oil major BP (BP, Financial) has released its quarterly results yesterday in which its profits plunged 20% coming from a decline in both upstream and downstream incomes. The company also has significant exposure towards Russia due to its 20% stake in the Russian oil behemoth Rosneft. The Obama administration has recently added the Russian company’s president to its list of sanctioned individuals.
The pessimism, however, can translate into a buying opportunity for long-term investors. Analysts have pointed out that during times of conflict; shares usually recover within a year. Moreover, the company is eyeing higher-margin growth in the long term, which will likely translate into revenue and income growth.
BP's shares have been up 4.7% year to date, easily outperforming the broader S&P 500 which has risen by 1.7% in the same period. The company's shares are trading just 6.88 times its trailing earnings. In these terms, BP is one of the cheapest European oil majors as compared to the higher P/E ratios of its rivals Royal Dutch Shell (RDS.A, Financial), Eni (E, Financial), Statoil (STO, Financial) and Total (TOT, Financial).
Quarterly Results
During the quarter, BP’s underlying earnings dropped from $4.2 billion in the first quarter of 2013 to $3.2 billion in the first quarter of 2014, better than analysts’ estimates of $3.1 billion, according to data compiled by Thomson Reuters.
The company’s reported earnings have plummeted from $16.86 billion a year ago to just $3.53 billion. These figures, however, are not comparable as last year’s results included a $12.5 billion gain from the sale of BP’s stake in TNK-BP.
Exploration and Production Operations
The company’s adjusted upstream earnings fell from $5.7 billion a year ago to $4.4 billion in the previous quarter. The decline was driven by lower production as well as an increase in non-cash charges. The company’s total production fell by 8.5% from last year to 2.13 million barrels of oil equivalents per day. This decline in production was partly attributed to the maintenance work on some of its biggest oil fields.
During the quarter, the company started three major projects: Chirag Oil project in Azerbaijan, Na Kika Phase 3 and Mars B projects at the Gulf of Mexico.
Refining and Marketing Operations
BP’s downstream earnings dropped from $1.6 billion in the first quarter of 2013 to $1 billion in the first quarter of 2014. This was brought on by the reduction in refining margins. However, the situation could change in the current quarter as the company has forecast “seasonally stronger refining margins supported by low product stocks, particularly in the US, and increased global turnaround activity.”
Exposure to Russia
BP also has significant exposure to Russia. The company owns a 20% stake in the leading Russian oil company Rosneft, the world’s biggest listed oil producer in terms of output. BP gets nearly 32% of its quarterly production from Rosneft.
Unfortunately, Rosneft is majority owned by the Russian government, which is currently involved in a conflict over Ukraine. Rosneft’s head Igor Sechin has been recently put on the sanctions list by the U.S, which caused a 1.4% drop in BP's shares.
BP's shares might come under further pressure due to the escalating tensions between Russia, Ukraine and the United States.
However, Rosneft is not being sanctioned. The company is currently working with some of the leading players in the oil and gas industry from the U.S. and Europe, such as Exxon Mobil (XOM, Financial), Royal Dutch Shell and Statoil.
Moreover, research has shown that on an average, stocks witness a 14% drop in the first three months of a major conflict, but usually recover fully in the following five months.
Production Growth
As evident from its quarterly results, BP gets most of its income from its upstream operations. Therefore, an uptick in production can result in top and bottom-line growth, even if the company continues to struggle in the downstream segment.
BP used to produce more than 4 million barrels of oil equivalents daily, a far cry from its current levels. The company, however, is eyeing growth in the coming years, despite its plan to sell $10 billion of assets by the end of 2015.
The company has recently re-entered the Gulf of Mexico after being banned in 2012 due to the oil spill disaster. The company participated in a lease auction held earlier this year in which it ended up winning 24 of its 31 bids. The company’s return to the Gulf could be a game changer for BP whose shares have underperformed, since the occurrence of the disaster, as compared to two of its biggest rivals at the Gulf: Chevron (CVX) and Royal Dutch Shell .
Although the newly acquired leases will not have any meaningful impact on BP’s production in the short term, the company’s $4 billion per year investment plan for the Gulf of Mexico can increase its deep-water production in the coming quarters. These funds will mainly flow towards BP’s four enormous platforms at the Gulf: Thunder Horse, Atlantis, Na Kika and Mad Dog.
Moreover, the company is currently working on a clever way to export crude from the U.S., by-passing the four-decade ban. BP is partnering with Kinder Morgan Energy (KMP) by buying 80% of Kinder Morgan’s mini-refinery in Houston. The facility will start operating as early as July. Through this investment, BP plans to slightly shuffle the hydrocarbons so that they become technically “processed,” making them eligible for export.
