Sell BP: Too Many Troubles Make The Stock A Value Trap

Oct.20.12 | About: BP p.l.c. (BP)

We reiterate our bearish stance on BP p.l.c. (NYSE:BP) due to its declining aromatics, gross, operating and refinery margins. The company has been going through litigation as a consequence of the Mocando Disaster, and it is expecting fines of up to $20 billion. The company is under the scrutiny of Azerbaijan for producing less-than-expected oil in the country. Its gross negligence and willful misconduct with regards to the Gulf of Mexico oil spill is still raising concerns for investors. A deteriorating profitability position is being foreseen in the coming period.

Azerbaijan warns BP

The President of Azerbaijan Ilham Aliyev's criticized BP for less-than-expected oil production from the ACG oil field. British Petroleum claims that the oil production from ACG field decreased by 12% over the course of the last one year. Azeri produced 78% (35.4 million tons) of the country's total crude oil, from the ACG oil field. Speaker of the National Assembly of Azerbijan Oqtay Asadov gave a final warning to BP to come up with the expected production level or shut down its operations in the country.

BP workers refuse to testify

Three of the company's executives refused to present evidence in the Mocando Disaster trial claiming that BP is a victim of the Mocando blowout. Mark Hafle, Brian Morel and Robert Kaluza are refusing to testify in court in order to avoid the possibility of getting incriminated. Nobody from the company is taking responsibility for the loss of lives of 10 workers, injuries to more than 17, and the destruction caused by the leaking of 4.9 million bbl of oil. Such news is turning investor and public sentiment against BP.

Stock price movements

As we predicted in our previous report, the stock showed a further downside of 4% over the course of the last one month. Its 50-day and 200-day moving averages are $42.3 and $41.07, respectively. The stock has been showing a continuous downward trend, primarily because of the company being associated with the Deepwater Horizon disaster, and also because of divestitures and the deteriorating financial position of the company. Despite a revenue increase of 1% over the last quarter, its gross and operating margins decreased significantly by 37% and 79%, respectively, due to poor refinery margins.

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The stock is currently trading at a forward price to earnings of 7.4x, at a discount when compared to the 9.2x forward P/E average of its peers. It is trading at a price to sales ratio of 0.35x, price to book of 1.1x and EV/ Revenue of 0.44x, again at a discount when compared to its peers, Chevron Corporation (NYSE:CVX) and Exxon Mobil (NYSE:XOM). In our opinion, the company's low valuation is a value trap and its low future growth prospects are justified in this valuation.

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

Business relationship disclosure: The article has been written by Qineqt's Energy Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.