Is BP Regaining Our Confidence?

Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shares of BP (NYSE: BP) have risen in recent months after the company's stock hasn't performed well at beginning of 2012. The company's oil spill related expenses will continue to pose a strain on BP's cash flow and performance. Moreover, oil prices declined in the fourth quarter and may have adversely affected the company's profit margin. Is BP showing signs of progress? Let’s examine the latest developments related to BP.  

BP and the Oil Spill

The company has sold in the past couple of years several of its assets in order to allocate funds towards the oil spill fines and cleaning costs. The company has raised nearly $38 billion out of the total $42 billion it had planned to allot for this issue. The company is also trying to lower the oil spill fine on account of its cleaning efforts in recent years. If BP will eventually be able to lower the fine, this could lower the company's financial risk. The oil spill expenses have set their toll on the company and raised its financial risk: As of September, the company's debt-to-equity ratio is at 0.43. Back in 2009, this ratio was 0.3. In comparison, Exxon and Chevron's ratios are well below the 0.1 mark. These findings suggest the financial risk of BP is much higher than that of its main competitors. 

Let's turn to the company's forthcoming financial reports.

Fourth Quarter Reports

BP will publish its fourth quarter reports for 2012 on February 5. Will the company be able to some growth in sales? In the financial reports  for the third quarter of 2012, revenues declined by 4.7% compared to same quarter in 2011. Alternately, the company's profitability rose to 9.1%. Nonetheless, the profit margin of BP is still lower than that of other oil companies.  

The operating profitability of BP was lower than that of other leading oil companies such as ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) during 2012, e.g.: Exxon’s operating profitability reached 15% in the third quarter of 2012; Chevron’s profitability was 17%.

BP's assets sales in recent months are likely to reflect in the company's revenues and will keep pulling down the revenues' growth in future quarters. Conversely, the progress of BP in cleaning the oil spill may reflect in the upcoming fourth quarter income statement: in the second quarter, the company's direct expenses related to the oil spill reached (page 23 in the financial reports; opens pdf file) $843 million; in the third quarter these expenses reached only $56 million. If this trend will continue and the expenses will further fall in the fourth quarter, this could pull up the company's profitability.

Let's turn to examine the recent developments in the oil and gas markets.

Natural Gas and Oil

As seen in the chart above, in the fourth quarter, the average crude oil prices declined by nearly 4% compared to the previous quarter and by 6% compared to same quarter in 2011. All things being equal, this could suggest the company's profitability and total revenues may be adversely affected by the decline in oil prices in the last quarter of 2012.

Conversely, the natural gas prices spiked in the fourth quarter by 23% compared to the third quarter and by 2% compared to the same time last year. The rise in natural gas prices may have positively affected the company's revenues growth. But keep in mind that the share of natural gas revenues from BP's total sales in its upstream operations account for only 10%, so the rise in natural gas prices will have little effect on the company's total revenues growth.   

Dividend and BP

Although BP has had a lower profitability than other oil companies, it still offers a higher dividend yield on account of its relatively low stock price: BP is providing a 4.86% yearly yield or $0.54 per share per quarter. In comparison, Chevron is offering a 3.22% yield or $0.9 per share per quarter; ExxonMobil is paying a 2.54% yield or $0.57 per share per quarter.

BP's cash flow in 2012 has improved compared to 2011: the free cash flow (the sum of CF from operating activities and investing activities) in 2011 was ($4,479) million; in the first nine months of 2012 the free CF reached $1,594 million. The rise in BP's free cash flow may have helped in the company's decision to raise the dividend in the recent quarter. Nonetheless, the free cash flow in 2012 (first nine months) doesn’t cover the nearly $4 billion dividend payment. This poses a threat on the dividend payment. 

Final Thoughts

I still think BP will continue to regain confidence of investors as the year will progress. The asset sale process is near its end, because the company raised most of the funds needed for the oil spill related expenses. If the company will be able to lower the oil spill fine this could help rally its stock. On the other hand, the decline in oil prices might lower the BP's revenues and profit margin, which could impede the growth in its free cash flow.

For further Reading:

Is Chesapeake walking towards the right path?

Why the Recent Rally in Natural Gas won’t help XOM

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.


liorc has no position in any stocks mentioned. The Motley Fool recommends Chevron. The Motley Fool owns shares of ExxonMobil. 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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