Consider This Oil Major Now While Undervalued
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
BP (NYSE: BP) is still busy trying to improve its financial situation and public perception since the 2010 Deepwater Horizon oil spill. I believe the poor publicity and financial consequences stemming from this incident and additional headwinds has made BP an undervalued asset in the market. These unfavorable scenarios continuously dip the price and create opportune entry points to invest in one of the top integrated energy firms at a discount. BP's management has become more prudent in its operations while divesting assets in order to defend itself against the collateral damage of these incidents. BP is making key investments in its long-term growth that should come into fruition within the next few years.
BP's sales growth has increased by around 9.5 percent from 2011, and by around 0.37 percent from the first quarter of 2012. BP has seen sales growth of 7.1 percent over past five years. Meanwhile, Chevron (NYSE: CVX) and Exxon Mobil (XOM) have seen five year growth rates of 3.84 and 5.19 percent, respectively. This is important because it shows that BP has been able to maintain long-term growth levels similar to its closest competitors.
The fallout from the 2010 Deepwater Horizon oil spill is still a significant concern for BP. Under the Clean Water Act, BP could be facing up to $21 billion in violations if found guilty of negligence or misconduct. In addition, BP could be facing $5 to $10 billion in criminal penalties. In March, BP already paid a $7.8 billion settlement to businesses and individuals harmed by the spill. BP would like to settle the rest with the states for $15 billion but analysts expect BP could be liable for close to $30 billion in federal government's claims for the incident. Louisiana alone, is looking to see it out in court and could be due somewhere close to $10 billion, a civil case is set for June of 2013.
Other states that may settle or bring BP to court include Alabama, Mississippi, Florida and Texas. BP also recently paid $13 million to the U.S. Occupational Health and Safety Administration for the majority of the 439 safety violations found in 2009 at its Texas refinery. BP has paid millions as a result of these violations and an explosion at the refinery that occurred in 2005. BP paid over $50 million in 2010 for the initial charges made by the OSHA. BP has yet to resolve 30 of the remaining violations with the OSHA. BP announced in 2011 that it would put the Texas refinery on the market.
BP has been aggressively divesting assets and curtailing operations in addition to looking for more promising investments that can lead to long-term substantial revenue. After an extensive 18 month review, BP has decided to postpone the $1.5 billion offshore Alaska oil project. Cost overruns and technical setbacks in conjunction with the climbing costs of lingering litigations and investigations lead BP to pull the plug for the time being. The Liberty project was projected to produce more than 40,000 per day starting in 2011 but BP concluded that the cost and time of completion would exceed original expectations. BP intends to confer with U.S. Bureau of Ocean Energy Management before resuming the project.
BP also divested its ownership in the North Sea fields for $280 million. Since the spill BP has sold around $24 billion in assets; it plans to complete the sale of $38 billion total by the end of 2012. BP is also selling its operation in Wyoming to Linn Energy (NASDAQ: LINE) for $1 billion. The sale gives Linn a strong position in the Green River Basin. Divesting these assets is being done in an effort to focus its operations to more core functions in Europe, investing more in developments in the U.K and Norway as well as two natural gas pipeline projects in Europe. Alongside ConocoPhillips (NYSE: COP), BP is also investing in $9 billion in Skyonic Corp to help finance Skyonic's first Texas facility. Buffett's Berkshire Hathaway recently sold 7 million shares of ConocoPhillips.
Along with Statoil (NYSE: STO), BP is currently dealing with production delays and poor publicity from a developing oil workers' strike affecting its Skarv Field in Norway. Statoil recently threatened to shut down production on the Norwegian Continental Shelf in an effort to end strikes that has pushed oil prices higher and hurt the company's revenue.
Despite the multitude of headwinds, BP is making efforts to invest in promising ventures for long-term growth. BP is currently negotiating to increase its presence in the Abu Dhabi onshore oil fields. Alongside Chevron and other investors, BP is also involved in a $30 billion Browse LNG export project that will soon be approved by the Western Australian government to move forward with their plans. Meanwhile, Chevron is facing fines of close to $25 million for an oil leak that occured in the Frade Oil Field in Brazil last November.
BP is evaluating land it's leased on the Utica shale in Ohio that may contain a recoverable 5.5 bbo and 15.7 tcf of natural gas. BP has also increased its investments in bio-fuels and wind assets. It's invested $7 billion since 2005, $4 billion being in the U.S, and plans to invest another $8 billion by 2013. BP is focused on the potential for cellulosic ethanol energy grass to compete and contribute to major global fuel consumption between 2020 and 2030. I urge shareholders to consider buying BP. I believe we will see long-term benefits through substantial dividends and capital appreciation as BP rebounds from the Gulf disaster by investing in these types of progressive projects.
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