BP (BP) is one of the 25 largest oil and gas companies in the world, sharing the stage with Exxon Mobil (XOM), Royal Dutch Shell (RDS.A), and Chevron (CVX). More than any time in recent history, large traditional energy companies are having to face a very uncertain future with respect to success in exploration and development activities, working with partners to establish better cost efficiencies, delivering supply in tandem with demand, and dealing with negative consequences of environmental impact. BP has been an industry giant, but since the Deep Water Horizon spill in April of 2010, which resulted in 11 fatalities and 4.9 million barrels of oil damaging coastlines in the Gulf Coast states, it has been struggling to find its footing.
BP has delivered successful results in its exploration and development programs. But it has not had great success with its partnership endeavors, and it has the overhanging cloud of settlement monies owing to Gulf states like Louisiana, Mississippi, and Alabama. The stock is trading off the lows of below $30 in 2010, but remains stuck below the $60 mark since the spill.
BP is currently trading around $42, in a 52-week range of between $33.62 and $48.34. The earnings per share are $5.38. The price/earnings ratio is 7.81. BP currently pays a dividend of 4.5%. The company has total cash of $15.18 billion and total debt of $47.66 billion.
BP's second-quarter results showed revenues were at $3.7 billion, compared to $4.8 billion in the first quarter of 2012. Operational cash flow was $4.4 billion in the second quarter, compared to $3.4 billion in the first quarter. The company took a pre-tax charge of $847 million toward various costs relating to the Gulf of Mexico oil spill during the quarter.
BP expects to meet its operational milestones by developing new projects, and is gaining potential with new exploration access and continues its $38 billion divestment program. BP gained access to new deepwater and U.S. shale exploration acreage in the first quarter of 2012. Its ongoing divestment program reached $23 billion in selling $1.2 billion and $1.7 billion in gas assets and natural gas liquids in Kansas and Canada, respectively, and has entered into an agreement to sell its Southern North Sea gas assets to Perenco for $400 million. It is looking to sell its non-strategic assets in the Gulf of Mexico
BP has added to its interests in equatorial margin plays by entering into farm-out agreements with Petrobras Brazil (XMBPRA). It has extended its interests offshore Namibia and has been awarded three new blocks offshore Uruguay. It has been granted access to the liquids rich Utica shale formation and is on track to start up six projects in 2012 in Angola. Its Whiting refinery project is over 60% complete and may start up in the second half of next year. It is still exploring the divestiture of two of its U.S. refineries and associated marketing assets. All of these actions are a part of BP's 10-point strategy to deliver value to its investors.
The TNK-BP joint venture is not going well. BP wishes to divest of its interest in the partnership and will be able to extend its reach to other companies that have expressed interest in BP's 50% stake in late July. The Russian partners Alpha, Access, Renova (the Russian oil partnership AAR) have indicated that they will offer $7 billion for BP's stake, which AAR acknowledges is worth $20 billion, but will impose a $13 million discount, which would compensate the partnership for the failure of an effort by BP to tie up a separate deal with state-owned Rosneft (ROSN) earlier this year against the wishes of the members of AAR. AAR would like to exchange its interest in the partnership for a 10% to 12% stake in BP, which would then free up BP to do business with Rosneft or Gasprom (GAZP). The parties may be willing to settle as the partnership is too lucrative in terms of production and dividends for all concerned.
BP faces continuing challenges with respect to the Gulf of Mexico oil spill of 2010. The company's first-quarter results included disclosure that BP had paid a total of $8.3 billion in individual, business, and government entity claims relating to the spill and that it had reached a definitive agreement with the representatives of the Plaintiffs to resolve the majority of economic and medical loss claims from the accident and spill. The cost of this proposed settlement agreement will be approximately $7.8 billion to be paid from a $20 billion trust established for this purpose.
President Obama enacted the RESTORE Act in early July, which requires that 80% of Clean Water Act penalties paid by BP be placed in a new trust fund for restoration efforts in Louisiana, Alabama, Mississippi, Florida, and Texas. In the absence of the bill, federal Clean Water Act fines would have gone straight to the U.S. Treasury. Under the RESTORE Act, anywhere from $4 billion to $16.8 billion could be directed to states' coffers. Louisiana, the hardest hit by the spill, will not see any payment until all the states and the U.S. government conclude a settlement with BP and its partners, or BP is found grossly negligent for the spill. Either way, the cost of Clean Water Act fines could increase considerably. BP has denied any claims of gross negligence or willful misconduct. There is little likelihood of BP being found solely responsible for the spill and going to court would be a lengthy and costly process for the states involved.
While BP continues to deliver excellent results in its exploration activities, which are a primary focus to improve shareholder value, the stock is stuck in its current 52-week trading range. It has delivered great production and has exploited its existing high margin assets and managed its downstream assets in a very rough environment for energy producers and refiners. Like Exxon Mobil, Chevron, and Shell it is a deeply entrenched major oil and gas company, which by its sheer size will be able to weather the very difficult time ahead.
Conversely, the stock performance is adversely affected by the company's difficulties with its partnership agreements in Russia and the Deep Horizon spill aftermath. The stock is trading just up off its book value and has a negligible short position. It is likely that unless there is some other catastrophic event or oil prices decline or increase sharply in the short term that the stock will continue to trade in its current 52-week range. Energy investors are taking a wait and see stance with BP right now. Investors will remain on the sidelines until its outstanding Deep Water and partnership issues are resolved.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.