Is This Oil Company Recovering?

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Shares of BP (NYSE: BP) haven't perform well during the year. The 2010 oil spill kept the company's stock from rising. The negative PR the company endured also didn't help BP's stock to recover. Is this company out of woods? Has done worse than other oil companies 2012? Let’s examine the recent developments related to British Petroleum. 

BP CDS continue to fall

The company’s credit default swap (five years, in US dollar) has declined in recent years: it has decreased from nearly 160 back in September 2011 to nearly 71 as of last week. Moving even further back, the company's CDS reached 630 basis points back in mid-2010. The current price of 71 means the annual premium is $71 thousand in case of a default of $10 million of debt within the next five years. The sharp fall in the CDS is another indication for the company's slow recovery and regaining the confidence of both bondholders and shareholders in this company's financial stability.

The chart below presents the developments of the 5 year CDS price in the past few years (weekly prices).

<img src="/media/images/user_10316/lior_large.PNG" />

One of the reasons for the decline in the CDS price is the company’s drop in uncertainty vis-à-vis its oil spill cost. Moreover, BP was able to raise $38 billion from the $42.2 billion the company decided to allocate for funding the cost and fines of the 2010 oil spill. But not all is well, the company still faces the civil trial of the states that could result in a higher than planed compensation. The suing States include Louisiana, Alabama, Mississippi and Florida. Some analysts speculate these States' will demand for an additional $34 billion for economic and property damages. For now, these numbers aren't substantiated but are likely to impede the growth of BP's stock; as the trial will progress it will become clearer if there is any reason for BP to start selling additional assets to cover additional cost for the oil spill.     

2012 Wasn't That Bad

BP's revenues inched down by 0.7% during 2012 (year-over-year). But BP wasn't the only company that didn't have growth in revenues in 2012. Other leading oil and gas companies including ExxonMobil  (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS-A) have also had a no-growth year: Exxon's revenues also declined by 0.8% during 2012 and Shell's revenues fell by 0.6%. BP's operating profit, on the other hand, took a beating and declined from 10.3% in 2011 to 5.1% in 2012. After controlling for goodwill provision and other accounting provisions the company's operating profit would have reached 6.8%. This a much lower rate than its top competitors: Exxon's profitability was 16.3% in 2012 and Shell's was 11%. So even though BP's revenues didn't grow in 2012, other leading oil and gas companies also didn't record any growth in revenues.

BP is also offering a relatively high dividend yield of 4.92%. In comparison, Shell is offering a slightly higher yield of 5.16% and Exxon offers an annual yield of only 2.57%.   

Natural Gas and Oil

During 2012, the price of oil (WTI) declined by nearly 7.1%. All things being equal, this could suggest the company's profitability and total revenues were adversely affected by the fall in oil prices during 2012.

Alternatively, the natural gas prices rose during 2012 by almost 5.9%. The rise in natural gas prices may have curbed some of the fall in the company's revenues. Nonetheless, since the share of natural gas revenues out of BP's total revenues in the upstream operations account for only 10%, the rise in natural gas prices have had little effect on the company's total revenues growth. Currently, it seems that natural gas won't tumble to its low prices recorded during the first half of 2012, but the price is expected to remain low compared to the five year average.

Final Thoughts

I still hold the opinion that BP will keep recovering and investors will slowly come back to this company. The company's high dividend yield and its positive free cash flow are among the company's strong points. BP still has a long way to go until it will be out of the woods completely. In the coming months, as the civil trial will enfold it will become clearer if this company will need to raise more cash for a settlement. In any case, it seems that the worst for BP is over.

For further Reading:

Will BP make a Comeback?

Will Natural Gas Fall to $2?

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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