In the wake of the 2010 Deepwater Horizon oil-rig explosion in the Gulf of Mexico that developed into the worst ever offshore U.S. oil spill, BP (BP) was forced to divest itself of about $50 billion of assets in order to raise funds. As a result, BP is far weaker of a company than it formerly was, but it is still a behemoth in the business of oil and gas, and it is arguably undervalued compared to its large-cap energy peers.
Shares of BP are essentially flat over the last 12 months, but the company is still down over 31 percent since the Deepwater Horizon fiasco occurred in mid April of 2010. BP had also suspended its dividend shortly after those problems started, and did not start paying a dividend again until the first quarter of 2011, at which point it paid out a $0.42 quarterly dividend, or half of the $0.84 it paid out per quarter from mid 2008 until mid 2010. In 2012, BP increased its dividend twice and paid out a $0.54 dividend in the current quarter.
Last week, BP reached a $4.5 billion settlement with the U.S. federal government relating to potential criminal charges from the rig explosion and gulf oil spill. While this will only eliminate potential criminal liability, it is also now anticipated that a civil settlement is forthcoming. The trial over such claims is scheduled to begin on February 25, 2013, and though it may be postponed, it is likely that parties are working hard towards reaching a settlement in advance of that date.
BP has also had issues stemming from its Russian ventures, where it had difficulties with its partners and the government, but those too have recently come to a resolution. Earlier this quarter, BP sold its Russian venture stake in exchange for $12.3 billion in cash and a 20% stake in OAO Rosneft, an integrated oil company majority owned by the Russian government.
Even after selling $50 Billion worth of assets in a buyers market, BP is still the fourth-largest oil company that is not majority owned by a sovereign power, with a market valuation of about $130 billion. The only energy peers that are larger are Exxon Mobil (XOM), the largest such entity with a market valuation of around $400 billion, as well as Royal Dutch Shell (RDS.A) and Chevron (CVX), both of which are currently valued at slightly over $200 billion.
BP's expected liabilities and the company's need to divest itself of assets in a fire-sale manner have resulted in a considerably lesser valuation that these peers. BP has a lower P/E ratio than the above-mentioned large-cap peers, though it should be expected that BP's asset sales would result in lesser revenue and earnings in the future. Moreover, even though BP's dividend is about 64% of its pre-spill payout, it already has a higher yield than its peers.
Another valuation distinction is that BP's oil and gas reserves are currently valued at a considerably lower appraisal price than are its peer's assets. BP's oil and gas reserves are valued at $7.07 a barrel, which is less than half of the $14.41 that European peer Shell's reserves are valued at, and about 43 percent of the $16.42 at which Exxon's reserves are valued. A large part of the difference is clearly based on the premise that a good chunk of BP's assets were and may still be for sale, resulting in discounted appraising, while the assets of its main competitors are not.
On a price to book valuation, BP is also at a discount to many of its peers, though not all. BP has a current P/B of about 1.1, while Exxon has a P/B of about 2.4 and Chevron's is at about 1.5. BP's European peers have comparable valuations compared to their books, but those book values are based upon higher reserve valuations due to non-fire-sale pricing.
BP's most valuable assets are geographically diverse and include assets in Angola, Azerbaijan and the North Sea, as well as the deep-water asset in the Gulf of Mexico that caused so much of its recent problems. BP's North Sea asset is its most mature of its major ones. Regarding its Gulf of Mexico assets, BP now has seven operating oil rigs and plans to add more. BP also continues to hold a reasonably large stake in its former Russian assets though its 20% stake in Rosneft, which currently valued at about $13 billion.
It is certainly possible that one of these larger peers will look at BP as a potential takeover or merger candidate. Any such a deal would clearly be massive in scale, likely valuing BP at least 15% higher than it currently trades, if not greater. While XOM is the company most capable of financing such a deal, it is also possible that Royal Dutch Shell would be a more appropriate acquirer, in an effort to make a European energy company of comparable size to Exxon.
Beyond such a massive acquisition, which would appear exceedingly difficult, it is entirely possible that BP will continue asset divestment and potentially split the company into two parts, thereby dividing its U.S. and international assets. This could help distance its international assets from any continued domestic fallout from the spill, and also make the international assets an easier pill to swallow for any interested party. If such a split were to occur, France's Total SA (TOT), with a current market valuation of about $110 billion, would also be added to the list of potentially interested parties.
Nonetheless, a takeover may not be in the best interests of BP shareholders. If it is true that BP is as undervalued compared to its peers as it appears, BP should end up growing at a faster rate than those peers in the coming decade. Moreover, BP's management will be eager to prove itself, including gaining shareholder appreciation, which could result in some strong moves up upon the announcement of any shareholder friendly plans.
Such appreciation is usually garnered through the advent of dividend increases and share buy-backs. BP has already begun aggressively growing its dividend, and these asset sales should leave BP with a decent amount of cash on hand. While the company is unlikely to announce a new share repurchase plan before resolving its civil liabilities, the announcement of a buy-back is probable after overcoming that hurdle, and could come as soon as the first quarter of 2013.
All in all, BP appears a better value than its peers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.