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British Petroleum (BP) is trading at cheap valuations and is offering a higher dividend yield compared to its peers. However, future developments, with regards to an oil spill over in the Gulf of Mexico, warrant a cautious stance.

Industry

Briefly speaking, the revenues and profitability of the Oil and Gas Industry are primarily driven by the prices of oil and gas in global markets.

Company Overview

British Petroleum is a leading integrated oil and gas company in the global market. It has two main business segments, namely Exploration and Production (E&P) and Refining and Marketing (R&M). The E&P segment is involved in oil and natural gas exploration, its development, and its production. It is also involved in midstream gathering, processing, marketing and trading of natural gas, natural gas liquids and liquefied natural gas.

The R&M segment is involved in refining, manufacturing, marketing, transporting and selling of petroleum and petrochemical products to end consumers, either directly or through its retail outlets.

BP is an industry leader in seismic imaging; an essential technology used in the identification of hydrocarbon reserves.

Exploration and Production Segment

The E&P segment has operations in 30 countries, including Angola, Azerbaijan, Canada, Egypt, Norway, Russia, Trinidad & Tobago (Trinidad), the U.K., the U.S. and other locations within Asia, Australasia, South America, North Africa and the Middle East.

Refining and Marketing Segment

The R&M segment owns and operates 16 refineries and 21,800 retail outlets. The segment has three main businesses being fuels, lubricants and petrochemicals, and has operations in 70 countries, including Europe, North America, Asia, Central and South America, Australasia and Southern Africa.

Proved Reserves, Daily Production and Refining Throughput

Hydrocarbon production during 2011 averaged 3,454,000 barrels of oil equivalent per day (mboe/d), which was 10% lower as compared to 3,822,000 barrels of oil equivalent per day (mboe/d) in 2010. This 10% decline in production was due to higher turnaround and maintenance activity, and the impact of a drilling suspension in the Gulf of Mexico.

The refining throughput for 2011 was 2,352,000 barrels per day, which declined 3% as compared to 2,426,000 barrels per day in 2010. The decline in throughput showed a decrease due to weather-related outages in the U.S.

BP's proved reserves are 17,748 million barrels of oil equivalent.

Financial Performance

BP's revenue increased by 26% in 2011, as compared to 2010, due to higher realizations resulting from the production in Libya being hampered, which came as a result of the Arab Spring in the Middle East. Revenues in 2010 increased by 24% due to a higher realization, as the prices of commodities recovered after the 2008 financial meltdown.

EPS decreased by 123% in 2010, as compared to the previous year, due to the oil spill over in the Gulf of Mexico eroding the profitability of the company, as earnings were decreased by a charge of $41 billion provisioned in 2010. Profitability in 2011 increased by 778% due to the higher realizations in 2011 and a tax credit of $3.8 billion with regards to the provisioning of the oil spill. Excluding the onetime items, EPS grew by less than 10%.

 

2011

2010

2009

Sales and other operating revenues

$375,517

$297,107

$239,272

YoY % change

26%

24%

-

Diluted EPS

$1.34

($0.20)

$0.88

YoY % change

778%

(123%)

-

Source: 10K

Cash flow from operations has shown an improvement of 63% in 2011, as compared to 2010, due to the increase in profitability in 2011. Cash flow from operations decreased by 51% in 2010 as compared to 2009, due to the decrease in profitability witnessed in 2010.

 

2011

2010

2009

Net cash provided by operating activities

$22,154

$13,616

$27,716

YoY % change

63%

(51%)

-

Capital expenditure

($17,845)

($18,421)

($20,650)

YoY % change

-3%

(11%)

-

Source: 10K

Spill over in the Gulf of Mexico

On April 20, 2010, an explosion aboard the Deepwater Horizon rig resulted in the death of 11 rig workers and caused an oil spill over of 4.9 million barrels in the Gulf of Mexico. Since then, BP has been at the center of claims, investigations and regulations, due to the alleged negligence on its rig. This event eroded BP's profitability in 2010. The company has continued to fund its $20 billion Deepwater Horizon Oil Spill Trust for the purpose of paying all legitimate claims (individual, business, state and local government), as well as funding of settlements, and restoration activities.

BP announced in Source: 10K that it had reached a settlement with the Plaintiffs' Steering Committee (PSC), subject to a final written agreement and court approvals, to resolve the substantial majority of legitimate economic losses and medical claims stemming from the Deepwater Horizon accident and oil spill. It estimates that the cost of the proposed settlement would be approximately $7.8 billion, which is expected to be paid from the $20 billion trust.

BP's settlement claim has won the company a postponement of its trial till 2013. With regards to claims laid by the U.S. government regarding the company's alleged gross negligence, if BP is found guilty, it will face a fine of up to $18 billion (13.70% of market cap).

Outlook

BP's stock price has reduced 31% from the oil spill over to date. The company has shown commitment with regards to the restoration of the damages caused by the oil spill, and fulfilling the claims of its affected parties. A settlement of $7.8 billion with the PSC will be favorable for the performance of the stock price going forward.

The trial on the alleged negligence claimed by the U.S. government will be critical for the company, as proof of negligence will result in a fine of $18 billion.

BP is trading at cheaper P/E and P/B ratios of 7x and 1.11x, and offering a higher dividend yield of 4.7% as compared to its peers mentioned below. However, the company still has a higher risk due to the spill over, and claims, affecting the future profitability of the company. Therefore, we have a Neutral stance on the stock.

 

British Petroleum

Exxon Mobil Corp. (XOM)

Chevron Corp. (CVX)

P/E

6.97

10.33

8.75

P/B

1.11

2.53

1.68

P/S

0.34

0.9

0.89

Dividend Yield

4.70%

2.70%

3.40%

Profit Margin

6.23%

9%

11.45%

3 month performance

-2.73%

1.24%

5.19%

YTD performance

-3.25%

0.34%

0.36%

12 month performance

-6.71%

2.47%

0.56%

Source: BP Warrants Cautious Stance As 2010 Spill Risk Remains