Will BP Continue to Recover?

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The price of BP (NYSE: BP) has recently rallied from its descent during May and June. The recent publication of the third quarter financial reports of the company revealed a rise in profitability and in earnings. However, the fall in the price of oil and in the stock market may have curbed the company’s recovery. Nonetheless, I still think the company may continue to rally in the remaining months of 2012. Let’s examine the recent developments related to BP and try to figure what’s up ahead for this company in the months to follow.  

BP Keeps Selling its Assets

The company recently announced it will sell its shares (50%) in to TNK-BP to Rosneft, the Russian Oil and Gas Company. The company will receive for its stake in TNK-BP $17.1 billion in cash and shares of Rosneft that represent 12.84% of the company’s shares. According to one report, the partnership BP had in TNK-BP was lucrative but had its share of trouble.

This recent sale is part of the company’s decision to sell assets in order to pay off the fines and cleaning cost of the 2010 Gulf of Mexico oil spill, which is estimated to reach nearly $38 billion by 2013. There are still open lawsuits that could result in a rise in the total amount the company will have to pay to plaintiffs. 

BP Financial Reports for Q3 2012

The recent financial reports for the third quarter of 2012 were much better than the previous quarter, even though there was a modest decline in revenues: there was a 1.9% decline in revenues in the third quarter of 2012 compared to the previous quarter, and a 4.7% drop compared to the same quarter of 2011. Conversely, the operating profit was $8.4 billion, which is 9.2% higher than the same quarter of 2012. As a result, the company’s operating profitability rose to 9.1% compared to 7.9% in Q3 2011 and a loss in the previous quarter. The drop in refineries margins might have been among the reasons for the rise in the company’s profitability.  

As seen in the table below the operating profitability of BP is still much lower than that of other leading oil and gas producers, including Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX). In comparison, Exxon’s operating profitability reached 15% in the third quarter of 2012, while Chevron’s OP reached 17%.

<img src="/media/images/user_12845/bp-profit-margin-november-2012_large.jpg" />

Although BP has had a lower profitability than the above-mentioned companies, it still offers a higher dividend yield: BP is currently offering a 4.51% yearly yield, or $0.48 per share per quarter. In comparison, Chevron is offering a 3.32% yield, or $0.9 per share per quarter, and Exxon Mobil is giving a 2.53% yield, or $0.57 per share per quarter. The higher dividend yield of BP compared to these other oil producers is another factor that should be taken into consideration when comparing the companies as an investment.

Oil and BP

One of the factors that may have held back the rally of BP's stock price was the recent drop in oil price. During October and November the price of oil (short term delivery) declined by 8%, and by extension United States Oil (NYSEMKT: USO) also decreased by 8.1%. Moreover, the correlation between oil price and BP’s stock is, as expected, mildly strong; during October and November the linear correlation between oil and BP’s stock was 0.44, which means that nearly 20% (under the assumptions of linearity and normality) of BP’s stock daily changes could be explained by the movement in the price of oil. Therefore, one of the factors that may be pulled down BP’s stock is the recent tumble in oil prices. If oil continues to decline it could continue to drag down BP’s stock. 

S&P 500 and BP

The S&P 500 index also declined during October by 2%. This recent fall could have also adversely affected BP’s stock. During October and November the linear correlation between the daily percent changes of the S&P 500 and BP’s stock price was 0.55, which is a mildly strong relationship. This relation suggests the recent decline in the S&P 500 could explain (under the certain assumptions) almost 31% of BP’s stock changes during recent weeks.

The normalized prices (to 100 prices as of Jan. 3 2012) of BP’s stock, the S&P 500 index, and crude oil (C1 future) are presented in the chart below.

<img src="/media/images/user_12845/bp-snp500-and-oil-november-2012_large.jpg" />

As seen in the chart herein, BP’s stock recovered from its tumble during May and June; the company’s stock has outperformed the price of oil during the year but hasn’t beaten the S&P 500 index, which increased by nearly 10;7% during the year.

What’s the Bottom Line?

I still think the company will continue to gain back the confidence of investors in the months to follow. BP is showing some signs of stability, and continues to pay a relatively high dividend for the oil industry. The company’s recent rise in profitability might not last long, but once it finishes its asset sales the uncertainty around the company will dissipate, which could lead to an additional rise in BP’s stock.

For further Reading:

Will BP make a Comeback in 2012?

Will Oil Continue Its Tumble?

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.

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