A Look into British Petroleum's Future

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British Petroleum PLC (NYSE: BP) is now selling most of its assets in order to cover its liabilities from the Mexican oil spill. Fuel trading helped the company increase its downstream profits while the sale of its TNK-BP unit boosted its cash holdings and the bottom line. In order to increase exploration, the company is planning to drill new wells this year. This report takes an in-depth look at the company’s fundamentals and its future prospects.

Company description

BP is a multinational oil and gas company with its headquarters based in London, England. It is Europe’s second largest oil company and it operates in all the segments of the oil and gas industry including exploration and production (upstream), refining and marketing (midstream) and transportation and sales (downstream).


In the first quarter of 2013, BP reported a net income of $4.2 billion, in comparison to $4.7 billion for the same quarter in 2012. When a gain of $12.5 billion related to the sale of half of its TNK-BP unit in Russia was included, the company made a $16.9 billion profit in the first quarter of 2013. The upstream segment reported a profit before interest and tax (PBIT) of $5.7 billion, down from $6.3 billion year-over-year, while the downstream reported a PBIT of $1.64 billion as compared to $0.9 billion a year ago. The company announced a dividend of $0.09 per share for the first quarter of 2013 that was expected to be paid in June.

Looking into the future

BP warns that its production for the second quarter will likely be lower than that of the first quarter of 2013 due to the sale of its assets. It also expects that cost will be higher in the second quarter as compared to the first quarter due to seasonal turnout activity. A major cash flow will come after the completion of an upgrade to its US refinery, and this is expected to enhance it’s downstream business. In January, the company announced new oil production from the Valhall field in the southern part of the Norwegian North Sea. It expects that the production from Valhall will continue to grow in the second half of 2013.

Looking at its exploration segment, BP plans to drill 15 to 25 wells by the end of 2013. Due to the sale of half of its stake in TNK-BP Russian, the company's total production was 5% lower than it was in the first quarter of 2012.

Selling US wind assets

BP announced the sale of its US wind energy assets as a part of its strategy to focus on oil and gas sector where the company expects greater margins to lie. The sale is also a part of a program to raise funds in order to cover the liabilities from the 2010 Deepwater Horizon spill in the Gulf of Mexico. BP also plans to sell its solar energy business.

Competitive analysis

Looking at the competition, Exxon Mobil (NYSE: XOM) is leading over BHP Billiton (NYSE: BHP)and BP with a market capitalization of $412.62 billion. A chart is given below that compares the overall performance of the three companies.

<table> <thead> <tr><th> </th><th> <p><strong>BP</strong></p> </th><th> <p><strong>XOM</strong></p> </th><th> <p><strong>BHP</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Market Cap:</strong></p> </td> <td> <p>$139.06B</p> </td> <td> <p>$412.62B</p> </td> <td> <p>$184.03B</p> </td> </tr> <tr> <td> <p><strong>Revenue</strong></p> </td> <td> <p>$374.81B</p> </td> <td> <p>$413.86B</p> </td> <td> <p>$66.98B</p> </td> </tr> <tr> <td> <p><strong>Gross Margin</strong></p> </td> <td> <p>11%</p> </td> <td> <p>30%</p> </td> <td> <p>76%</p> </td> </tr> <tr> <td> <p><strong>Net income</strong></p> </td> <td> <p>$22.68B</p> </td> <td> <p>$71.86B</p> </td> <td> <p>$9.61B</p> </td> </tr> <tr> <td> <p><strong>EPS</strong></p> </td> <td> <p>$7.10</p> </td> <td> <p>$9.83</p> </td> <td> <p>$3.60</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>6.13</p> </td> <td> <p>9.44</p> </td> <td> <p>19.22</p> </td> </tr> </tbody> </table>

BHP Billiton is the world’s largest mining company. It is venturing into oil and gas exploration and production segment. In 2011, BHP Billiton bought Petrohawk Energy Corp. (HK) at a cost of $12.1 billion in cash. The company acquired $17 billion of production and exploration assets in 2011 due to which it became the largest U.S. oil and gas player. Recently, the company appointed a new CEO, Andrew Mackenzie, who is well suited to run the company smoothly in the current macro environment. The new CEO is planning to cut capital expenditure and is focusing on returning cash to shareholders.

Exxon Mobil is the largest oil and gas trading company in terms of market capitalization. In the past few years, Exxon rewarded its shareholders well by repurchasing shares and increasing dividends. In the first quarter, it distributed $7.6 billion to shareholders through share repurchases and dividends. Exxon reported an increase in profit due to the strengthening of its chemical business. The company declared a dividend per share of $0.57, up 21% year-over-year. It is currently trading at $90.69 and is very near its 52-week high of $93.48.


Despite the lower net income, BP demonstrated a strong trading performance in the first quarter of 2013. The uncertainty regarding the Deepwater Horizon accident makes BP a high risk investment, however. Any news about the Deepwater incident will greatly affect the share price. As a result, I would recommend the existing investors to hold on BP's stock.

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