Ever since its stock plunged below $30 in wake of the Gulf oil spill, investors have been wondering whether BP PLC (NYSE: BP) is worth buying. The question came up again this week as the stock slumped 3% following a big-time earnings miss.
So is BP a bargain?
No… not yet anyway.
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Two years after the Deepwater Horizon disaster, BP insists it’s turned a corner – and maybe it has. But there are still a few more corners to turn before the company becomes investment-worthy.
BP’s latest earnings statement made that clear.
BP reported a 19% drop in first-quarter earnings, which fell to $5.9 billion from $7.3 billion last year. And that’s despite the fact that oil prices in the first three months of this year were higher than they were in 2011.
Several factors contributed to the decline, including settlement payments related to the Gulf spill, a drop in oil and gas production, and a total collapse in downstream profits.
And none of these problems will be going away anytime soon. So for BP, things are going to get worse before they get better.
BP Still Troubled By Turbulence
The reality is that while BP has paid much of the bill for the 2010 Deepwater Horizon disaster, there’s still a mountain of litigation for the company to overcome.
For instance, the U.S. Department of Justice is still investigating possible criminal and civil charges against BP. That could add billions of dollars to the more than $16 billion in settlements the company has already agreed to pay.
To cover its costs, BP has been selling off assets in a fire sale. So far the company has agreed to sell business units worth $23 billion and has targeted another $15 billion of divestitures by the end of next year. As a result, BP currently has about $8 billion left on hand to cover liabilities, according to Citigroup Inc. (NYSE: C).
That should be enough to hold the company over for now, but how long will it last?
BP itself has admitted that there’s still “significant uncertainty” concerning future litigation, claims and fines. And analysts are questioning whether BP’s remaining assets are even worth as much as the company claims.
Furthermore, with all its money tied up in litigation and settlements, where will BP find the capital to invest in growth? Last year the company said that its operating cash flow would increase 50% by 2014, but it doesn’t appear to be on track to meet that goal.
BP’s operating cash flow for the quarter was $3.4 billion, compared to $2.4 billion in the first quarter of 2011. However, it was adversely affected by inventory levels and price increases, which resulted in a $3 billion jump in net working capital.
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Meanwhile, asset sales have brought in capital but they’ve taken away production.
BP’s oil and gas production fell 6% in the first quarter, to 2.45 million barrels of oil equivalent per day. Exploration and production profits tumbled 5.9%, as a result. And replacement cost profit – a measure oil companies use to negate the change in the value of inventories – came in at $4.93 billion. That’s a sharp drop from $5.61 billion a year ago and below consensus estimates of $5.1 billion.
The company also warned that output would fall even further in the second quarter as plants are shut down for seasonal maintenance.
BP’s downstream business took a big hit, too. Downstream profits in the first quarter plunged to $924 million from $2.2 billion, dragged down by a 63% decline in the company’s fuel business.
The Silver Lining for BP
Of course, as bad as it looks now for BP, there’s still some hope for the future.
BP has already put a total of $16.6 billion into a trust fund established to pay the costs of the Gulf spill. The company expects payments into that fund to reach the targeted $20 billion in the fourth quarter of this year – a year earlier than anticipated.
BP has already paid $8.3 billion to individuals and local businesses that were affected by the spill, and in March, the company reached a $7.8 billion settlement with the Plaintiffs’ Steering Committee (PSC).
And BP is returning to the Gulf of Mexico, where it was the largest producer prior to the disaster. The company currently has five drilling rigs operating in the Gulf and it should have eight by the end of the year.
On top of that, BP’s stakes in Angola and India have seen incremental growth, and the company just took 40% stakes in four deepwater concessions off the coast of Brazil.
With a price-to-earnings (P/E) ratio of 5.5, the stock is relatively cheap and brings a 4.5% dividend yield to the table.
Still, with oil supplies high and demand threatened by the possibility of a second global downturn, there are better places to put your money.
Shell’s production rose 1.4% to 3.55 million barrels a day as new projects came on-line and the company is targeting a jump to four million barrels per day by 2018.
Earnings from upstream operations rose 16% to $6.71 billion, and downstream profits rose 13% to $1.32 billion – though that was due largely to one-time charges last year and one-time gains this year.
So keep an eye on BP for now, but there’s still a little more dust that needs to settle before it becomes a “Buy.”