BP Continues to Under-perform but for how long?
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The price of BP plc (NYSE: BP) rose during the first two weeks of August by 7% but is still 2.2% below its starting point from the beginning of the year. Most of the recent rally was probably, in my opinion, due to the recovery of oil prices and the S&P500 and not because of BP's current economic situation. The recent financial reports of the company (for Q2 2012) weren’t good and the decline in profitability could continue in the next quarters. Nonetheless, there are some positive points that make this company's stock attractive. Let’s examine the recent developments related to BP and analyze what is up ahead for this company.
BP Financial Reports for Q2 2012
According to the financial reports of BP for the second quarter of 2012 the company hasn’t done well: the company’s net loss was $1.3 billion for Q2 compared with a net profit of $5.7 billion in Q2 2011. But this figure is misleading because there are some adjustments to consider including inventory holdings, and a net loss from non-operating items. After considering these adjustments, the underlying replacement cost profit reached $3.7 billion which is still nearly $2 billion lower than the underlying replacement cost profit during Q2 2011. BP is still paying off the settlement – this settlement is estimated, by the company, to cost BP nearly $7.8 billion –for restoring the Gulf of Mexico after the oil spill. As long as the company will continue to payoff its debt, the financial reports of BP won’t improve by much in the next quarters.
Nonetheless, the company is still offering a relatively high dividend yield for the industry: BP is offering a 4.5% yield. As a comparison, Exxon Mobil Corporation (NYSE: XOM) is offering a 2.6% yield; Chevron Corporation (NYSE: CVX) is offering a 3.2% yield; Total SA (NYSE: TOT) is offering a 4.8% yield.
This means that even if BP won’t rise during the year it will still pay dividends that to some will be a reasonable compensation for the risk of investing in this company. Further, as long as the company is offering such a high dividend yield the company’s stock will remain strong and won’t tumble (assuming, of course, there won't be any big surprises).
BP Sells Assets
The company has announced it will sell a couple of its assets: on August 10, BP sold its gas processing plants in Texas for $227.5 million.
On August 13, BP sold its refinery in Carson, California and all its related logistics and marketing assets in that region for $2.5 billion. These two sales might be to help payoff the company's debt but could also reflect a change in the company's direction, which could eventually raise the company's profitability –especially if the company will sell natural gas related assets (the recent decline in natural gas prices reduced the profitability of producing and selling natural gas).
I also think the company should focus more on its upstream operations than its downstream operations since the former are more profitable than the latter (based on BP's financial reports).
Oil and BP
One of the contributing factors to BP's rally was the recent rise in oil price: during July and August the price of oil (short term delivery) rose by 9.9% and by extension United States Oil (NYSEMKT:USO) increased by 9.7%. Further, the correlation between oil's price and BP’s stock price is, as expected, very strong – during July and August the linear correlation between oil and BP’s stock reached 0.71, which means that nearly 51% (under certain assumptions including linearity and normality) of BP’s rally could be attributed to the recovery of oil's price. Therefore, one of the main reasons for the recovery of BP’s stock was the rise of oil's price. If oil will continue to trade up it could continue to rally BP’s stock price.
S&P 500 and BP
The S&P 500 also rose during the past couple of months (July and August) by 3%. This rally could have also contributed to the recovery of BP. During the past couple of months the linear correlation between the daily percent changes of the S&P500 index and BP’s stock price was 0.71, which is a strong relation as the relation BP has with the oil price. This means the rise of the S&P500 could also explain (under the above-mentioned assumptions) nearly 50% of BP’s stock volatility in 2012.
The chart below presents the changes of the BP’s stock, the S&P 500, oil's price (C1 future) during 2012 up to date, in which the rates are normalized to 100 as of January 3rd 2012.
The chart shows how both BP and oil prices made a comeback in the past several months after they had declined between March and June. Up until now the S&P 500 has outperformed BP’s stock.
What is the bottom line?
I suspect the recent rally of oil prices and S&P 500 were the main factors to pressure up BP’s stock; the financial reports weren’t too positive and may continue to be so during the rest of the year, but as long as the company’s uncertainty around its debt – to the restoration of the Gulf of Mexico – continues to dissipate and the company moves towards selling off assets that relate to less profitable activities, the company could rally by the end of the year.
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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.
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