Is BP Out of the Woods?
Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The price of BP plc (NYSE: BP) has yet to recover from its decline earlier this year. Even the recent rise in the prices of natural gas (up until mid-September) didn’t help the company’s stock. Hurricane Isaac affected the BP’s cleanup of its 2010 oil spill at the Gulf of Mexico and may have impeded the company’s progress. Since the U.S is still in Hurricane season there is still uncertainty around the potential adverse effect of the weather on the company’s future progress in the cleanup. In the meantime the company continues to sell its assets to payoff the oil spill. The company’s financial reports for the recent quarter show the company isn’t doing well. Will the company be able to recover from its disappointing financial reports in the following months? Let’s examine the recent changes related to BP and analyze what is up ahead for this company.
BP Continues to Sell its Assets
The company had announced it recently sold several of its assets: on September 13 the company agreed to sell its 18.36% interest in Draugen field in the Norwegian Sea to AS Norske Shell for $240 million in cash.
On September 10 the company had agreed to sell its interests in a number of oil and gas fields in the deep-water U.S Gulf of Mexico for a total of $5.55 billion. It also sold, as of September 28, its entire holding in BPCM for a grand total of $230 million in cash. BP recent sold its Texas City refinery for $2.5 billion. All these sales of assets are likely to keep the company out of the woods for the rest of the year and help the company to payoffs costs related to the oil spill (clean up and compensation), which is estimated at $38 billion to be reached by 2013.
BP Financial Reports for Q2 2012
The recent financial reports for the second quarter of 2012 didn’t look good: There was a drop in revenues by 1.9% in the second quarter of 2012 compared to the previous quarter and by 8.7% compared to the parallel quarter of 2011. Further, the operating loss was $1.6 billion. This loss was mainly due the company’s added provision for the sales of assets $4.8 billion. Nonetheless, even when controlling for this provision the company’s operating profitability was only 3.4% compared to 9.5% in the previous quarter and 8.7% in Q2 2011.
Despite the uncertainty revolving the company’s financials and the decline in the company’s stock, BP is still offering a reasonable dividend yield compared to other oil and gas oil producers: BP is offering a 4.56% yield or nearly $0.48 per share per quarter. As a comparison, Chevron Corporation (NYSE: CVX) is offering a 3.07% yield or nearly $0.9 per share per quarter; ExxonMobil Corporation (NYSE: XOM) is offering a 2.47% yield or nearly $0.57 per share per quarter. The higher dividend yield of BP compared to other oil producers is worth considering as a plus for the company.
Oil and BP
One of the factors that may have curbed the recovery of BP's stock price was the recent decline in oil price: during September and October the price of oil (short term delivery) fell by 6.8% and by extension United States Oil (NYSEMKT: USO) also declined by 7.1%. Further, the correlation between oil price and BP’s stock price is, as expected, mid-strong – during September and October the linear correlation between oil and BP’s stock reached 0.54, which means that nearly 28% (under certain assumptions including linearity and normality) of BP’s movement could be explained by the shifts in the price of oil. Therefore, one of the factors that may be impeding the progress of BP’s stock is the recent decline of oil prices. If oil will continue to dwindle it could continue to hold back BP’s stock price.
S&P500 and BP
On the other hand, The S&P500 index rose during the past several weeks (September and October) by 3.9%. This rally could have contributed to the rally of BP. During the past several weeks the linear correlation between the daily percent changes of S&P500 index and BP’s stock price reached 0.73, which is a strong relation. This means the upward trend of S&P500 could explain (under the certain assumptions) nearly 53% of BP’s stock shifts in the past couple of months.
The chart below shows the changes of BP’s stock, the S&P500, and oil's price (C1 future) during the year up to date, in which the prices are normalized to 100 as of January 3 2012.
As seen, BP and oil haven’t performed well during the year and have yet to recover from their tumble during the previous months. On the other hand, the S&P500 index rose by nearly 14% during the year.
What is up ahead for BP?
I suspect the recent rally of the S&P500 was one of the main contributing factors to the modest recovery of BP’s stock in recent weeks; the financial reports weren’t positive and the ongoing yard sale of BP’s assets isn’t likely to help the company recover from its tumble. Once the company will complete its assets sales, it will be clearer what assets are left in the company. This, in turn, could reduce the uncertainty around the future value of the company.
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liorc has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.