Could Cuba Be BP's Future?
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Just last week, BP (NYSE: BP) agreed to pay $4.5 billion in damages, fines, and restitution. The 2010 disaster not only left a huge environmental blot in the Gulf of Mexico, but also killed 11 workers. The company was at fault and it should have paid up much earlier, so that its investors wouldn't be affected as much. If BP is found to be grossly negligent, it can face up to $20 billion in fines.
Being the worst offshore oil spill in the U.S. history, lawmakers are not going to sit on those files, and will make sure that BP will hit hard. However, I do believe BP is being proactive in trying to close the case by paying what it has to. BP's chief financial officer Brian Gilvary told investors that he expects to appeal, if charges of gross negligence are slapped on the company. He also added that he expects the case to be completely resolved by 2014 and 2015.
What does that mean for investors? Well, there is certainly going to be a bearish tone when it comes to numbers. The company will need a few months before it can regain its position in the market. BP shares are something that should be held and not sold. It is one of the largest oil companies in the world and will remain that way no matter what the outcome of the case is. If you want long term benefits, it is better to buy BP shares when its stock falls so that you can wait for the company to pull through its time of crisis. Once the crisis is over, there are several areas where BP can make a fresh start. Cuba is one of those countries.
Cuba is just a few hundred kilometers from the Gulf of Mexico, and oil majors are patiently waiting to enter the Communist nation, once the U.S.-enforced embargo is lifted. Because of the suspicious nature in which the Cuban government has behaved for the last several decades, the American government rightfully enforced a trade embargo that prohibits companies from investing in Cuba.
Cuba also has several restrictions that make it ultimately impossible for a company like BP to even imagine exploring and drilling in the pristine Caribbean waters. It is a widely believed that Cuba holds vast amounts of oil and natural gas, but that it is just off limits at the moment. Fidel Castro is on his death bed, and the future of the country is not secure at the moment. The man who ruled Cuba for decades with an iron fist is finally about to crumble to dust, and a new beginning may be soon around the corner.
When Fidel Castro dies, Raul Castro and others will not be able to continue anti-market policies because of a changing world. It is no longer possible for a communist country to succeed in today's world, and the communists themselves know it. This is precisely why both China and Russia have adopted a capitalist market while adhering to communist political ideals with regard to free speech and human rights. Cuba will eventually have to shed its anti-capitalist economic policies and liberalize.
Considering Cuba's proximity to the U.S., oil and natural gas deposits in Cuban waters can help U.S. companies make a lot of money. The reason why I believe BP is at an advantageous position is because of the lessons it has learned thanks (or no thanks) to the Deepwater Horizon oil spill. BP knows the risks of exploring in the Gulf and the surrounding region, and it also has technical knowledge about fracking in area. BP is aware of the repercussions that an oil spill might have on Florida, if an accident occurs in Cuba.
The company also understands the topology of Northern Caribbean and the Gulf of Mexico more than other companies. Also, because of all the criticisms it has had to endure in the last two years, BP will also be better prepared legally, in case things go awry in Cuba. Of course, the oil spill was a major disaster, but BP can utilize its lessons in establishing a very successful oil and natural gas operation in Cuba, when the market is liberalized. We must also note that Cuba remained strangely quiet when the oil spill occurred. It almost felt as if Cuba does not want to antagonize BP in case it ever wants to do business with the company. These factors make me think that BP is in a better position to do business in Cuba, when the day actually arrives.
BP's competitors like Chevron (NYSE: CVX), Royal Dutch Shell (NYSE: RDS-A), Petrobas (NYSE: PBR) and Total (NYSE: TOT) are interested in Cuba too. In fact, most of these oil companies have tried to establish contacts with Cuban officials, though much is underreported. Chevron's business across the world is booming at the moment. The company has struck deals in Russia, where Vladimir Putin has been very welcoming. Shell has had to face flak because of environmental issues in Nigeria. The company had to spend millions of dollars in clean up acts which were not its fault any way. Shell's pipelines were sabotaged by rebels and hooligans, and crude oil was stolen. In the process, oil leaked into protected marshland.
Being in Latin America, Petrobras has strong geopolitical interests in Cuba. It has never stated or mentioned what it would like to do in Cuba. However, when the time arrives, Petrobras will be one of the few countries to grab the opportunity. French oil company Total's business is doing exceptionally well in Kurdistan. It is one of those companies that have always tried to enter undiscovered and unchartered territories. I suspect Cuba will be on its agenda.
BP currently trades at $40 and has a price to book ratio of 1.10 and a price to sales ratio of 1.10. The company will have to do more in order to produce a lot of oil and gas, and Cuba might help BP to compete with its rivals. BP's market cap is $130 billion and its enterprise value is $162 billion, which still suggest that it is a huge company. With a profit margin of 4.75% and an operating margin of 6.45%, BP will have to look for newer avenues to make sure that its investors remain happy. BP's total debt is $49 billion, while its operating cash flow is $19 billion. These numbers indicate that BP needs to expand its business to newer destinations such as Cuba, when the time is right.
jordobivona has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Chevron, Petroleo Brasileiro S.A. (ADR), and Total SA. (ADR). 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!