Is It Too Little, Too Late for BP?
Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While many integrated oil and gas companies seem positioned for growth in the future, BP (NYSE: BP) is not one of them. Though the company is continuing to focus on expansion and increased production, there are a few occurrences that trouble me. BP's stock price is very close to the middle of its 52-week range, and it offers a great dividend yield of almost 5 percent. Investors may be intrigued by these numbers, as am I, but I cannot recommend buying the stock given its current situation.
The Gulf of Mexico oil spill of 2010 is still haunting BP two years later. The company currently faces an investigation of whether officials intentionally lied to the government on the size of the spill. BP's estimates of how much oil was leaked into the ocean were 20 to 50 percent lower than the government's estimates. If the government finds BP negligent in its handling of the disaster, it could be fined up to $4,000 per barrel. Without negligence, BP's maximum fine will be $1,100 per barrel.
The federal government has already taken legal action against one of BP's engineers, who deleted important data and refused to provide requested information. If the government finds BP negligent in its handling of the matter, these legal issues will only grow worse.
Both current and potential investors in the company need to pay close attention to the situation. If BP is found negligent, there will be two results. First off, they will be forced to pay huge fines, which will act as an increase in costs, affecting the profitability of the company. This will probably lower return on investment and decrease the value of the company - both bad for investors.
The second result is the irreparable damage to the company's reputation. Once the public finds out BP was negligent, it may be very difficult for them to bring in new investors. While the oil spill itself hurt BP's name, if the public finds out they did not cooperate with the government to fix the spill, BP's reputation could be destroyed. Add in any legal action past the fines and this disaster could have a lasting, negative effect on the company's stock.
Aside from its oil spill woes, there is a large amount of uncertainty regarding BP's Russian joint venture with Alfa-Access-Renova, known as TNK-BP Group. The Chief Executive Officer of the joint venture, Mikhail Fridman, recently resigned from the project. His resignation adds to the project's main concern: ineffective corporate governance. TNK-BP's board of directors has not met since December of 2011, and lacks the quorum needed to legislate. The ineffective management of this joint venture has led BP to pursue the sale of its 50 percent stake in BP-TNK. While this sale could bring in a huge amount of money, it will also ensure the loss of roughly 25 percent of its current crude oil output. The news certainly does not bode well for a company looking to hang on to some stability.
The uncertainty around this situation with BP-TNK and the Gulf of Mexico oil spill make me extremely wary of buying BP stock. I question where the company will look to increase its oil production after a potential sale of its stake in BP-TNK, which currently accounts for a huge portion of its crude oil production. I also wonder how BP's reputation will fare and how severely it will be fined given the new investigation.
BP will need to continue expanding if it sells off its stake of BP-TNK. The company has restarted its exploration for oil in Libya; the project was postponed as of last February due to civil unrest in the region, but new economic and political circumstances have allowed the work to continue. This comes at a great time for BP, as competitor Shell has exited the Libyan oil market, leaving more room for BP to capitalize on the region. The lack of stability in Libya makes this a risky investment, but as the region settles, the company should see increased return on investment and a bump in its stock price.
BP is also continuing its Clair Ridge Project, signing a $23 million contract with Emerson Electric (EMR) to construct two new offshore oil platforms in the North Sea. The Clair Ridge Project is a joint venture between BP, ConocoPhillips (COP), Chevron (NYSE: CVX), and Shell meant to use the newest technologies to improve the efficiency of oil recovery and avoid environmental damage. Chevron holds a 19.4% non-operated interest in the project, which will have the capacity to produce up to 120,000 barrels of crude oil a day.
The steps taken by BP to ensure continued expansion and exploration of profitable projects are attractive to investors. Further progress in these joint ventures should eventually lead to increases in oil production, revenue, and profitability.
However, I still do not recommend investing in BP. While it is looking to grow and, by doing so, increase the returns for shareholders, I do not believe it is taking enough steps to bring in new investments, given all the uncertainty surrounding the company. Furthermore, while other integrated oil and gas companies, such as ExxonMobil (XOM) and Chevron, have also been struggling, I believe these companies are in better position for future growth, both short and long-term.
BobbyFisher has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.