Why Smart Investors Are Avoiding BP Now

Jul.10.12 | About: BP p.l.c. (BP)

It appears as though BP (BP) is largely unable to focus on the expansion of its oil and gas production, as the repercussions from the Gulf of Mexico oil spill continue to be the company's primary focus. Currently at a price of about $39 per share, BP's stock has continued to struggle on the low side of its 52-week range. One of the company's few bright spots from an investing standpoint is the relatively large dividend yield rate of 5.02 percent, for annual dividends around $2 per share.

BP is in the process of selling its stake in two North Sea oil fields to Mitsui & Co. for $280 million. This deal is meant both to help BP pay for the damages from its 2010 Gulf of Mexico oil spill and to help refocus its North Sea portfolio to core areas. Of the estimated 7,000 barrels of oil produced each day, BP currently holds more than a 13 percent stake in the Alba field, and just about 9 percent in Britannia.

BP has divested around $24 billion of assets since the oil spill, and aims to divest a total of $38 billion by the end of next year. The head of BP's North Sea operations, Trevor Garlick, believes these divestments will help BP's strategy of developing more focused business in the United Kingdom and Norway while also helping the company recover from the massive oil spill. From a prospective investor's standpoint, I would rather see integrated oil and gas companies increase its investments, looking to search for and expand into new profitable areas instead of selling off assets.

Unfortunately for BP, this divestment of assets is not an isolated event. The energy giant is also planning to sell its operations in Wyoming to Linn Energy (LINE) in an all cash deal worth $1 billion. The sale will also help BP pay for the devastating oil spill that is two years in the past. According to the agreement, BP will sell over 12,500 acres of the Jonah field, which is located in southwest Wyoming. The 750 wells in the area contain 73 percent gas, 23 percent natural gas, and just 4 percent oil. BP has made sure to note that it is not exiting the United States onshore operations market, but it is, in fact, looking for long-term growth possibilities.

Fortunately for BP, Tropical Storm Debby, which has been pounding the coast of Florida and temporarily halted production of some oil fields, has weakened. This will allow BP and Royal Dutch Shell (RDS.A) to redeploy workers and continue operations. This should provide relief for BP and its stock presence, as any elongated halt in production would have really hurt its stock price and made attracting more investors difficult.

Although BP has been focusing on selling its assets to restructure its core business, it is also working to expand its production of oil and natural gas. The company is in the process of investing in two pipeline projects that will carry natural gas into Europe. This is a doubling-down in its involvement in the Shah Deniz project, even though expected costs have risen. These projects, which are expected to enhance the European Unions energy security against Russian imports, involve developing the giant gas field in Azerbaijan's part of the Caspian basin.

The success of these projects should be extremely profitable to BP, since it is of such great importance to Europe. Instead of paying the high costs of Russian imports, Europe will rely on these pipelines, which will lead to profit for the invested companies, most notably BP.

Another good investing opportunity BP is taking advantage of is in Skyonic Corp. BP and ConocoPhillips (COP) have invested $9 million into Skyonic to help it build its first commercial facility in Texas. This facility is expected to capture 75,000 metric tons of carbon dioxide emissions each year from a cement plant in San Antonio. In an age where extreme importance is put on creating a healthy, sustainable environment, investments by oil and gas companies to help reduce ecological footprints are great investments to add value to the industry.

In other news, oil workers in Norway have officially gone on strike as of June 24. This strike, the result of broken negotiations between unions and the gas and oil industry association will affect both BP and Statoil (STO) production of gas and oil. The strike will gradually ramp up over time, unless an agreement over a pension issue can be reached. BP's Skarv field will be impacted, as work will be postponed, even though it hasn't officially started producing gas or oil. If this strike continues too long, it could drastically hurt BP's future gas and oil output, as the Skarv field will fall far behind its expected production.

While the headlines regarding BP have been mixed as of late, I do not think investing in BP is a smart move to make for interested investors. The company is still preoccupied by selling assets to pay for the destruction it caused in the Gulf of Mexico. Due to this, its attention has been diverted away from the strategy of exploration and increased production, which most other integrated oil and gas companies are doing. I do not believe the few expansion projects and investments taken by BP will be enough to continue growth and increase value above $40 per share. There's not enough opportunity to earn big until something else changes for BP, and so I say either wait or stay away completely.

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