An Attractive Income Investment Emerges From the Shadows

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 the epitome of a company with significant investment risks because of the consequences of the Gulf of Mexico oil spill in 2010, resulting in billions of dollars in fines and liabilities. It is easy to get caught up in the negative headlines, but the fact of the matter is that BP is a giant that operates profitably. The company has paid more than $24 billion related to the oil spill and estimates that it will have to pay a total of $42 billion to fully resolve its liabilities. These are staggering figures, but the markets have already discounted the bad news in the current stock price. Below, I will discuss whether the stock is worth investing in at this time on the basis of the company's recently announced fourth quarter earnings.

Fourth Quarter Highlights

BP has just announced its financial results for the fourth quarter and full year 2012. The replacement cost profit, adjusted for non-operating items and fair value accounting effects, was $4 billion for the quarter, compared to $5 billion for the same quarter in the previous year. For the full year, replacement cost profit was $17.6 billion in comparison with $21.7 billion in 2011. 

Cash flow from operations for the quarter was $6.3 billion and $20.4 billion for the full year in comparison with $22.2 billion in 2011. At the end of the year, BP’s net debt was $27.5 billion down from $31.5 billion at the end of the preceding quarter, representing a gearing level of 18.7%.

BP’s upstream production of oil and gas, excluding TNK-BP, in 2012 was more or less flat at 2011 levels and in line with the guidance. Fourth quarter production, excluding TNK-BP, was 2.29 million barrels of oil equivalent a day (mmboed), which is 7% lower year on year.

BP’s downstream operations delivered record earnings for the year, and this was the fourth consecutive year of profit growth. In the quarter, in spite of the benefit of strong operations, refining margins were significant lower compared to the preceding quarter, and the planned outage at the Whiting refinery as part of the upgrade project impacted the quarter’s results.

Pursuant to the criminal settlement agreement with the DOJ, BP recorded an additional charge of $4.1 billion in the fourth quarter. The total net charge for the Gulf of Mexico incident at the end of the year was $42.2 billion. In this quarter, BP had an EPS of $1.25 per share, easily beating the $1.05 per share consensus estimate but down 21% year on year.

Asset Divestment & 2013 Production Outlook

The sale of BP’s interest in TNK-BP to Rosneft and related transactions expected to result in BP acquiring a 19.75% stake in Rosneft were agreed on in the quarter and are expected to be completed in the first half of 2013. In addition, during the quarter, BP agreed to the sale of non-core upstream assets in the North Sea and China and of the Texas City refinery and related assets. Excluding the sale of the stake in TNK-BP, BP has now achieved asset divestments totaling $37.8 billion since 2010 and completed its strategy of portfolio simplification a year ahead of schedule.

Oil and gas production is expected to increase in 2013 because of production from new projects and reduced outages for maintenance. Two major upstream projects began production in the fourth quarter with a total of five new major projects going online in 2012. The PSVM project on Block 31 offshore Angola, one of the largest subsea developments in the world, commenced production in early December and the Skarv field located in the Norwegian Sea began production at the end of the quarter.

The company expects four new major upstream projects to come online by the end of 2013, namely Angola LNG, North Rankin 2 in Australia, Na Kika 3 in the Gulf of Mexico, and the Chirag Oil project in Azerbaijan. A further six major projects are expected to commence production in 2014, and the major upgrade of the Whiting refinery in Indiana is expected to yield benefits from the second half of 2013. Next year, the company expects underlying production of oil and gas to grow but estimates the total number of oil-equivalent barrels produced will drop about 150,000 per day given asset divestitures

The Competition

Like BP, the other integrated energy producers, Chevron (NYSE: CVX) and Exxon Mobil (NYSE: XOM), were also able to reap the benefits of integration with strong downstream earnings compensating for the decline in upstream earnings.

For Chevron, sales and other revenues for the quarter were $56 billion, down from $58 billion year on year, primarily because of lower crude oil volumes.  However, full-year 2012 earnings were $26.2 billion (EPS of $13.32 per diluted share), only down 3% from $26.9 billion (EPS of $13.44 per diluted share) in the previous year because of the downstream contribution. 

For Exxon Mobil, there was an increase of $550 million or 6% year on year in earnings to $9.95 billion, and EPS was $2.20, which is a growth of 12% from the same quarter of the previous year. Upstream earnings were $7.76 billion in the quarter, a decline of $1.06 billion year on year, but downstream earnings were $1.76 billion, up $1.34 billion from the same quarter of the previous year. 

In contrast, ConocoPhillips, which has separated its upstream and downstream businesses, reported fourth-quarter 2012 earnings of $1.4 billion, or $1.16 per share, compared to fourth-quarter 2011 earnings of $3.4 billion, or $2.56 per share. A part of this was due to the lower realized prices for oil, which were not offset by increased margins from the downstream business.

Conclusion

BP remains a strong and profitable company. I believe that it will emerge from the shadows of the oil spill disaster as a stronger company. It is currently an attractive investment, especially for income investors, with its most recent dividend increase of 12.5%, and the yield is now in the region of 5%, compared to 3% for Chevron and around 2.5% for Exxon Mobil. If you were looking for an attractive income investment opportunity, I recommend looking at BP.


jordobivona has no position in any stocks mentioned. The Motley Fool recommends Chevron. 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!

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