BP: Removing Uncertainties Should Boost Valuation

| About: BP p.l.c. (BP)
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Edited by Kate Boehme

BP plc (NYSE:BP) is one of the world's leading international oil and gas companies. BP provides fuel for transportation, power for heating and lighting, general services, and petrochemical products for everybody items. BP is a global brand, performing at the cutting edge of the energy sector. It uses world-class resources, engineering, functionality and know-how to fulfill consumer energy needs and provide long-term value.

BP is currently responding mainly to concerns surrounding the final settlement in connection with the Gulf oil spill. In particular, the company is expanding and pouring funding into production and reserves. BP is also restructuring and reestablishing its assets portfolio with a concentration on value creation.

Negations with US Authorities

BP is anxious to negotiate all essential oil spill financial obligations for which it has paid and reserved $38 billion. The majority of the outstanding obligations involve federal, state and local governments. Debts are particularly focused on environmental punishment fines, for which BP has set aside $3 billion. Each supplemental $1 billion repayment would potentially affect earnings by 50 cents per share.

Reaching a fair and reasonable settlement between BP and the US government regarding the Gulf oil spill would eliminate a significant portion of this risk-causing uncertainty. Settlement with the US government should also boost company stock.

Sales to Reach $38B Target

Recently, BP has announced the sale of its U.S. southwest fuel chain. This announcement provides a useful benchmark for assessment of the company's focused disposal deliveries. BP has confirmed the sale of its retail network and Carson Refinery to Tesoro (TSO) for $1.175 billion. In addition, Tesoro also purchased BP inventory worth $1.3 billion. This sale was largely due to BP requiring an additional $11.5 billion in revenue to meet its $38 billion target by the end of 2013.

In addition, BP also has other various resources identified for disposal. In particular, this includes a 100 percent share in a 475kbd refinery at Texas City, and non-strategic upstream interests in the Gulf of Mexico. Company management is also considering the disposal of non-strategic upstream interests in the North Sea.

At the moment, I project total income of between $6.5 billion and $7.5 billion from these identified sources. This would leave between $4-$5 billion still in need of collection from other areas.

At the moment, BP needs to collect a further $4-5 billion, on top of all those resources already declared or identified, within the next 16 months. At the end of June 2012, BP had $144 billion in assets, meaning approximately five percent of the company's total assets ought to comfortably cover its remaining financial targets.

Second Quarter Results for Fiscal 2012

For the second quarter of 2012, adjusted earnings amounted to $3.7 billion, or $1.16 per share. This $3.7 billion is only around 35 percent below the past quarter. In addition, revenue for this period was 81 percent upstream and 19 percent downstream, with 82 percent generated outside the United States. Throughout the quarter US-based income was drastically decreased due to comprehensive field maintenance offshore, where the majority of BP's revenue is typically generated. Profit is also adversely affected by lower prices and production from field servicing. The lower TNK-BP for this period is due to failing oil rates, cost pull inflation, and the declining North American gas business.

At the end of the second quarter, BP's cash balance stood at $16.6 billion, while financial debt amounted to $47.7 billion, and net financial debt was $31.1 billion. Meanwhile the company's equity was recorded at $112 billion, and the net financial debt ratio was 22 percent based on standard oil and natural gas prices. Based on this report, BP is estimated to produce operating cash flow in surplus of $30.9 billion. This $30.9 billion would be enough to finance $22 billion in capital costs as well as $5 billion in dividends.

Furthermore, BP is producing cash from property sales of $24 billion since 2010. The company is also expecting an additional $14 billion before the end of 2013.

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$135 billion

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Cash Flow Analysis

Based on current estimates, BP ought to present a cost-free cash flow of $8.5 billion and $8.7 billion in 2012 and 2013, respectively. The company expects this cash flow to appear in the wake of investing $22 billion in CAPEX and $5.6 billion in dividends over the course of the past year. It also has $22.4 billion planned for investment in CAPEX forecasted for 2013.

With such financials planned, BP is also expecting a 50 percent raise in operating cash flow by 2014. Half of this increase ought to be derived from reaching an end to the company's financial obligations to the oil spill trust fund at the end of 2012's fourth quarter. The remaining 50 percent is expected to come from reestablishing high-value production and a Whiting Refinery. The refinery will be capable of producing more than 80 percent less expensive heavy crude.


I think an acceptable settlement deal between BP and US federal, state, and local governmental authorities would eliminate some uncertainty and raise the company's share price. Furthermore, a conclusive, positive result in BP's efforts to sell its 50 percent share in TNK-BP would also substantially improve the company's financial versatility and boost its stock.

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