The British oil company(NYSE:BP) is currently operating in an unstable oil market, with the over supply of oil reflecting on the company's poor share prices. Furthermore, with the bad connotation it is suffering from the infamous oil spill over five years ago, the future does not seem too promising for the oil giant. However, the company is actually currently undervalued and that makes now the right time to buy the stock at a bargain price. The British company, who boasts an impressive US$4.003 billion profit, has been a long time player in the game. Formerly named British Petroleum, the company was established in 1908. The oil company brags an impressive title of being one of the world's six supermajor oil and gas companies. Throughout its over 100 years of experience, BP has lived through several oil recessions and no doubt has enough experience and composure to defend itself against this current crisis. Furthermore, the company has a very stable balance sheet and will be a beneficial long-term asset to add to ones portfolio.
Deepwater Horizon settlement
The devastating oil spill which began in April 2010 that resulted in 11 casualties was a consequence of a sea-floor pipe explosion on the gulf of Mexico. The outcome was a massive amount of oil spewing into the sea for 30 days. The spill resulted in obvious negative publicity for the company. However, earlier this week, the oil giant has agreed to pay a $18.7 billion settlement to the federal government and more than 400 local governments along the Gulf Coast for the Deepwater Horizon oil spill in what was the largest corporate settlement in US history.
The settlement now means BP can focus its energy and resources on current firm specific issues and help build a long term future. A conclusive Bod Dudley, chief executive said "It has been a very important quarter for BP," Dudley said. "We reached agreements in principle in the United States to resolve the largest remaining liabilities in relation to the Deepwater Horizon oil spill". He went on to add, "This has been recognized as a landmark step forward by all parties and leaves us all able to chart a much clearer course for the future."
Even with its current poor financial position, BP is still able to pay out a dividend of 10 cents per share to shareholders. Such news helps to demonstrate strong reassurance and loyalty to its shareholders. Furthermore, the settlement, which is to be paid over an 18-month period, reduces uncertainty about the ultimate financial impact of the spill.
The company now has more breathing space and allows them an opportunity to change its way of thinking and start conducting a business plan. Jonathan Barber, a portfolio manager at Columbia Threadneedle Investments cemented this idea as well by saying, "They've got a chance to completely reset the strategy."
Best of both worlds
As the Chinese economy slows, and with it dragging down the global market, oil prices have plummeted to a six-year low. According to the BBC, Brent and US crude futures fell below $45 and $40 a barrel, respectively, as global investors assessed the contagion risks of China's volatile stock market.
Such news puts oil companies, such as BP, in a transaction period and raise a pivotal question. Should they cut spending now and save cash and in turn not raise capital, or should they keep capital spending levels going and fill the fund with debt. Both options are not fitting, as the cut in spending will limit the research and development sector within the company and thus the company will lack an innovative edge in the future. On the other hand, the increase in spending will just increase the debt and look poor on the balance sheet.
However, BP argues that they are able to enjoy the advantages of both scenarios by forcing some of its suppliers and contractors to bear some of the costs. BP can cut costs without compromising too much of the future thanks to cheaper rates from oil services companies: Mr. Dudley, the Group Chief Executive Officer of BP says, "We now expect our organic capital expenditure to be below $20 billion for 2015 compared to our guidance back in a $100 world of $24 billion to $26 billion. This is being achieved, for this year, largely through rephasing and paring back of marginal activity, but we're also seeing benefits from deflation. Industry commentary suggests offshore costs are reducing rapidly, and this is consistent with what we are seeing in our supply chain. This gives us confidence in sustaining a lower level of capital spend over the medium term while maintaining the same growth aspirations"
The declining offshore rates are vital for BP as a much larger portion of its current and future production is tied to offshore development in places such as the Gulf of Mexico, West Africa, and the North Sea. Therefore, if the company can get significant savings on contracts for the equipment and services related to the development of these resources, it should help BP navigate today's climate without being left with an empty project tremble several years from now.
$1 billion in offshore drilling near Scotland
BP are set to invest in the Eastern Trough Area Project (ETAP) which consists of nine fields, six of which are operated by BP. The move shows the company is still looking to spend on more capital even with the uncertainty of the oil market.
The ETAP, located in the Central North Sea and covering 35 km in diameter, is known for its high operating costs, falling output and unattractive taxes and thus many remain skeptical of BP's conclusion to increase expeditions in the area. However, it is likely that a big multinational corporation such as BP has comprised a thorough cost-benefit analysis and has concluded that the project is worthwhile. According to Reuters, the company will secure the field until 2030 and beyond. In addition, the project will increase the efficiency and performance of the valuable resources. As Deirdre Michie, BP's U.K. chief executive of oil and gas, said in a statement "Given the harsh business environment upstream oil and gas companies currently face...industry as a whole is putting a great deal of effort into improving the performance of its assets."
Fundamental analysis
Furthermore, other figures within the company are somewhat positively surprising. The company has a current debt-to-equity ratio, 0.54, which is low and also below the industry average, suggesting the company management of debt levels is effective. In addition the company has an adequate quick ratio of 1.00. The fundamental analysis is an easy way to gauge the company's liquidity, and BP's ratio illustrates the ability to avoid short-term cash problems.
With regards to the company revenue, BP has managed to outperform against the industry average of 37.8%. Although since the same quarter one year prior, revenues fell by 35.5%.
BP was upgraded by investment analysts at Argus from a "hold" rating to a "buy" rating in a note issued to investors on Thursday according to Yahoo Finance. News of the upgrade came on July 30th however is a strong indication that the company is moving in the right directions.
Similarly, the mean recommendation for the past two weeks has been on the way point of buy and sell, and considering the poor financial climate I feel this shows the company is in a strong positive.
Recommendation Summary* |
Mean Recommendation (this week): | 2.6 |
Mean Recommendation (last week): | 2.6 |
Change: | 0.0 |
* (Strong Buy) 1.0 - 5.0 (Sell)
(Source: Yahoo Finance)
The mean target price is $41.21 and the median target price is $41.58 both significantly higher than the current share price of $33.17. I do believe these targets to be matched and following BP recent developments.
Conclusion
Although the oil market and especially the general financial climate in looking unstable, I still believe BP will be one of the first to recover from this bleak financial crash. A significant time has passed since the BP oil spill and with BP issuing a settlement earlier this month I reckon BP will looking into a bright future. Furthermore with the oil and gas giant impressive management strategies and its recent $1 billion investment the company are moving in the right direction.
The I Know First's algorithmic analysis mirrors the bullish stance that the company is showing. The indicators throughout this article suggest that BP will be of long term value in the future, and is a stock investors should consider purchasing.
