Ever since the Deepwater Horizon oil spill tragedy of 2010, BP (ticker: BP) has been treading deep water of another kind: a veritable sea of red ink.
The company formerly known as British Petroleum has dished out more than $54 billion in settlements and costs related to the disaster. To put that in perspective, it totals roughly five times Marathon Oil Corp.’s (MRO) market cap of $10.9 billion. BP also paid roughly twice that cap in October alone — more than $20 billion — to settle the last of claims against it with the U.S. Department of Justice.
It may be decades before the incident, which killed 11 workers and spilled more than 200 million gallons of oil into the Gulf of Mexico, becomes a distant memory. And even if BP remains one of the world’s seven dominant oil and gas companies, there’s no guarantee it will survive the decade without seeing its fortunes further dissipate.
Here’s why: Slashed oil prices may delight America’s driving public but they’ve further bottomed out BP’s bottom line.
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In December 2010, just months after Deepwater, a gallon of regular gasoline averaged $2.96. Today, it costs $2.32 — down 22 percent and at levels last seen in 2009. And while prices have risen about 30 cents since January, it’s not as though the suits at BP’s London headquarters are bumping fists.
“We see earnings per share growing 2 percent per year after removing the impact of changes in commodity prices,” says Brian Youngberg, energy analyst with Edward Jones in St. Louis. “This growth outlook is the least attractive of the integrated energy stocks we provide opinions on.”
Youngberg calls BP a hold: “Its reliance on Russia and offshore activity around the world raises uncertainty given sanctions and low oil prices.” And he’s not alone in that opinion.
“As of right now, I’d consider it to be a hold but those that have purchased shares of the stock should closely watch its performance,” says Jeffrey Zucker, co-founder of Green Lion Partners in Grand Junction, Colorado. “And as alternative energy options improve, investors should consider getting out of oil as a general category of investing.”
Out of 13 other analysts, six also call BP a hold, and one labels it an underperformer. Yet six also call it a strong buy, perhaps in part because BP has plenty of room to go up. The stock is off 25 percent from this time last year and trading at about $31 a share.
The optimism stems in large part from BP’s efforts to streamline its financial structure along the Three Rs path: restructure its portfolio, reduce costs and rebalance its cash flow.
“BP has made a strategic shift to reduce its non-core upstream business — exploration and production — to the more profitable downstream business of refinery and trading,” says K.C. Ma, director of the George Investments Institute at Stetson University in DeLand, Florida.
Brian Gilvary, BP’s chief financial officer, acknowledges the external industry challenges but took great pains to highlight BP’s internal efforts.
“We continue to see real momentum in resetting the cost base,” Gilvary said in BP’s April earnings call for the first quarter of 2016. “This is working to lower the point at which we expect to rebalance organic cash flows in 2017, and supports our continued commitment to sustaining the dividend.”
That dividend, 10 cents per ordinary share, is expected to hit investors’ pocketbooks in mid June. “The yield is well above the market average,” Youngberg says. “It could be cut if oil prices fell again, but otherwise we believe it will be maintained given the solid balance sheet, reduced spending plans and significant cash balances.”
To that end, BP has sold off half its U.S. capacity — a huge portion of its upstream holdings that include refineries in Carson, California and Texas City, Texas. Worldwide, BP has also shed many North Sea oil and gas fields, and its Yacheng gas field in the South China Sea, Ma says.
Meanwhile, BP’s capital expenditures for 2016 are expected to drop by $1.5 billion from 2015 to a total of $17 billion. That may balance the bottom line until oil prices rebound, which many industry observers expect to happen later this year. It also marks a significant decrease from 2013, when the figure peaked at $24.5 billion.
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Still, not all experts are convinced BP has cut enough.
“It’s not nearly as much as some of its competitors,” says Sridharan Raman, an analyst from Thomson Reuters. “Consider that Chevron (CVX) cut capital expenditures from $37 billion in 2013 to $29 billion in 2015.” What’s more, “Chevron is expected to allocate only $25 billion for 2016, and has targeted reducing that even further to between $17 and $22 billion in 2017.”
If Chevron achieves that $17 billion goal, its expenditures will have dropped a staggering 54 percent over just four years. At the same time, BP may face headwinds should some of its current strategies backfire.
“The drastic portfolio restructuring, or asset sales, has raised risk concerns of BP’s future production performance if and when the refinery environment strengthens,” Ma says. “BP’s increasing reliance on Russia, after its reduction in the U.S. capacity, is also worrisome.”
Oil production, after all, has always hinged on geopolitical concerns, whether in the Middle East or Venezuela.
BP holds a 20 percent equity stake in Rosneft, Russia’s largest oil company. “Russia is the second largest contributor to BP’s production and earnings, next to the U.S., and increasing Russian sanctions (triggered by its Ukraine aggression) will undermine BP’s operation,” Ma says.
And BP can hardly afford undermining at this point — even a shade of it.
“The industry has seen a slight recovery in return on net operating assets over the past year, but BP has seen it continue to decline,” Raman says, adding that “trailing fourth quarter profit margins show no sign of bottoming and are at five-year lows.”
So where does BP drill for a profit gusher at this point? Certainly, its pivot to a more profitable part of the oil and energy sector has it following that downstream current.
But BP is also betting on a future where so many variables remain — with politics, production and prices just the start of it all. And while the Deepwater Horizon debacle is now six years past, BP will spill payouts to settle the record-setting judgments against it for years to come. Future civil litigation also hangs in the balance.
When the downsides and upsides are crunched against each other — at least for the time being, and with one big asterisk — BP showed a profit for Q1 2016 of $532 million, versus analysts’ estimates of a $140 million loss. BP shares jumped 4.5 percent following the news.
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The asterisk, of course, is that BP’s profit was net of Deepwater Horizon costs of $917 million. “It is far from over yet,” Ma says. “But even if the stock market is not easily forgiving, this report may imply BP a good buy.”
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BP Still Paying at the Pump originally appeared on usnews.com
