The Foolish Case for British Petrol
Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Ranked fifth and sixth by Forbes in terms of sales and profits, respectively, British Petroleum (NYSE: BP) is an international producer and marketer of oil and gas products in more than 80 countries. It operates in two segments: exploration and production, as well as refining and marketing. BP sells products under sub-brands in many major markets. These brands include ARCO, BP, ARAL and Castrol.
Based on the latest information listed on the company’s official website, BP owns (or partly owns) 19 refineries internationally and has a refining capacity of 2.8 million barrels of crude oil per day. Since last year, BP has risen by 379 spots to eleventh place in The Forbes Global 2000 survey.
Deepwater Horizon Disaster
The much-publicized Gulf of Mexico oil spill was attributed to a BP offshore oil rig. The Deepwater Horizon rig exploded on April 20, 2010, resulting in eleven deaths and millions of gallons of crude oil leaking out into the ocean. The U.S. Department of Justice accused BP of "gross negligence and willful misconduct," resulting in disaster. The potential cost the company might have to incur has been estimated at up to $38 billion, while attempts to reach settlement deals with the U.S. government and affected individuals continue to develop. In order to meet these costs, the company has sold its Texas City refinery and, earlier in the year, sold its Carson refineries in California for $2.25 billion. BP will also have to pay fines under the Clean Water Act, ranging from $1,100 to $4,300 per barrel.
Future Challenges and Prospects
Russian oil giant Rosneft formally submitted its $25 billion bid for BP’s 50% stake in the TNK-BP, a Russian joint venture. Through this deal, BP is expected to receive between $15 billion and $20 billion in cash, plus a 10%–20% stake in Rosneft. Shareholders can expect BP's stock to rise, as its cash flow situation will be improved. Its current free cash flow stands at $7 billion, but while this will bring a boost in the short term investors should be mindful of the payment that needs to be made to the parties affected by the Deepwater Horizon disaster.
Since the incident, BP has turned its fortunes around and posted $26 million in income. High gasoline prices have helped the company make a profit and set aside funds for whatever the outcome may be of the oil spill settlements, while at the same time continuing the company’s progress by building up profits and expanding production. The company’s current market capitalization stands at 135.4 billion, with a dividend yield of 4.32%. Since 2010, when the company cut its dividend amount for investors, the payable dividend value has been witnessing a year-by-year increase. With a current share price of $43.10, BP is an attractive and affordable oil stock that promises consistent dividend payouts along with increasing earnings.
Buying this oil and gas giant before it fully recovers provides investors with a unique opportunity to make a prudent and most certainly profitable investment. The company’s focus had been on fending off lawsuits and cleaning up the oil spill. Now, the effort is finally paying off as the company’s reputation improves. Furthermore, its financial position is not only stabilizing, but also getting brighter, with its focus on production rather than minimizing losses from the accident.
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