Brace For A Big Sell-Off In BP

| About: BP p.l.c. (BP)


BP reports the worst annual loss in at least 20 years.

Oil slump takes its next big victim after Chevron.

The Company has till date incurred $55.45 billion in charges over the Gulf of Mexico oil spill incident.

British Oil Major BP (NYSE: BP) has reported an annual loss of $6.5 billion for 2015, boosting chances of a downgrade of the energy sector. The sector is being hit hard by the relentless decline in crude oil prices which plummeted 40% in Oct-Dec quarter alone.

Exxon Mobil (NYSE: XOM) is due to report its earnings today, and investors are not keeping their hopes high after the dismal earnings reported by Chevron (NYSE:CVX) and BP. If the oil giant misses Wall Street's expectations by a huge margin, the downgrade becomes imminent.

Coming back to BP, the company submitted a press release detailing the fourth quarter and the full year results today. The company reported shrinkage in all operating segments while the Gulf of Mexico oil spill settlements weighed heavily on the earnings.

Disastrous Performance in Q4

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The snapshot from the official release clearly states that British oil major witnessed a 90% slump in its underlying replacement cost profit (net income) on a quarterly basis. Analysts on an average had expected $730 million in underlying RC profit but the company reported a mere $196 million, increasing concerns that the next quarter may be even more disappointing. For the same period and the same metric, a year ago, BP had managed $2.24 billion.

The replacement cost profit dived from $8,073 million in 2014 to a loss of $5,162 million in 2015. The company expects a $1 billion restructuring charged to be incurred in 2016 as well.

Dividends Kept Constant

The company announced a quarterly dividend of 10 cents per ordinary share to be paid on March 24, 2016. American Depository Share (ADS) holders will receive 60 cents per ADS after subtracting some fees.

Scrip Dividend Program: Shareholders have also been provided with an option to receive their dividends in the form of new ordinary shares and ADS holders in the form of new ADSs. Details about the same can be viewed here.

In my opinion, the company should rather do away with its dividend policy which has pushed up the company's net debt figure to $27.15 billion in 2015, compared to $22.65 billion in 2014. The company calculates net debt by subtracting cash and cash equivalents and the fair value liability of hedges related to finance debt from the gross debt.

2010' Gulf of Mexico Oil Spill Continues to Haunt BP

The Gulf of Mexico oil spill happened in April 2010, but the company continues to incur various costs as fresh business economic loss claims spring up under the Plaintiff's Steering Committee (PSC) settlement. The income statement includes a pre-tax charge of $443 million for the fourth quarter and $11,596 million for the full year, representing settlement costs, finance costs and the ongoing costs of the Gulf Coast Restoration Organization.

Till date, the oil giant has incurred $55.45 billion in charges since the incident. What's worse? It is hard to calculate how much more the company will have to shell out before it all ends. BP states,

"There continues to be uncertainty regarding the outcome or resolution of current or future litigation and the extent and timing of costs relating to the incident not covered by the Agreements. The total amounts that will ultimately be paid by BP in relation to the incident will be dependent on many factors."

"Management believes that no reliable estimate can currently be made of any business economic loss claims not yet processed or processed but not yet paid, except where an eligibility notice has been issued and is not subject to appeal by BP within the claims facility."

"The submission deadline for business economic loss claims passed on 8 June 2015; no further claims may be submitted. A significant number of business economic loss claims have been received but have not yet been processed and it is not possible to quantify the total value of the claims."


BP is trying hard to stand strong even as it battles an unprecedented slump in oil prices, and the huge oil spill settlement bills. While I expect the low price environment to sustain for the next 12 months at least, it is hard to tell how low the stock will go as it becomes clearer that even the biggest players in the energy sector are going down with the oil crash.

Couple this with the uncertainty posed by the settlement claims, it becomes a grave matter of concern to the market regarding the financial strength of the company as it begins 2016 on a terrible note.

It has become an incredibly tough task to call the oil bottom, and one who says he has it figured out, he is most probably bluffing. While it may be argued that now is the time to be greedy when others are fearful, it must also be noted that the stock isn't cheap enough to play the oil rebound. It won't be a profitable gamble.

Personally, I see oil going below $25 per barrel in 2016, and hence, stocks of energy companies ghastly underperforming the broader markets. And that is when, one should consider buying stakes in the energy companies.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.