British Petroleum Is A Buying Opportunity To Explore With "Sudden Dips"

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Dec 30, 2014

With world oil prices going southwards, U.K.-based oil major British Petroleum (BP, Financial) is emerging as a stock to watch, narrated by some as simply "a buy with dips." Due to the financial jolts, the company has been forced to spend $1 billion in restructuring charges alone, where the Finance director Brian Givalry made announcements saying, "What you'll see with this simplification plan is that headcounts are starting to come down across all of our activities in upstream, downstream and in the corporate centres; essentially the layers above operations." This was followed by them cutting their capital expenditure for 2015, by a margin of $1 to $2 billion approximately, as the recent revelation of a top management memo also reveals. The news is now popularly known, which in turn has sent ripples throughout the world’s major markets, but experts say BP remains a ‘buy’ which is current taking its dips.

For a majority of 2013 and 2014, the world oil price per barrel was hovering around the $100 mark, but recent trends have shown it traveling in the $70 price region. Needless to say, the ripples have been felt within the company, and the recent measures by the upper peg of management have been certainly demonstrative that the company is not sailing as smoothly. One of the major changes is the stalling of new exploration and production projects, which means that it will first bring itself up to date with what they have been doing since 2010. This further translates that some of their ambitions in the exploring and production will be delayed, while a chunk of those not being economic for them will eventually be shut down.

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Looking at competitor’s map

The repercussions of the price fall in the oil market, has been felt on the BP competitors as well. Royal Dutch Shell (RDSB, Financial) has taken a 12% hit on its share price in the year, and like its competitor BP, needs to put in a halt to many its exploration projects. In fact, rating agency, Standard & Poor (S&P) has put its outlook review for the company as being negative, owing to high capital expenditure which remains inflexible, and also a high dividend rate. This, they say, will negatively affect the cash flow of Royal Dutch and also British Petroleum for 2015, which might even run on to 2016 depending on the intensity of the oil price crash!

On a similar note, Chevron (CVX, Financial) has been hit with the same financial crisis in the industry. Its Canadian branch had ventured into the Arctic region for drilling for new oil resources, but has put the $103 million project on hold. In the bid to explore a part of the deep water of the Beaufort Sea Toutoyatuk, N.W.T., the NYSE listed oil major had spent major cash flow which it was gaining due to the pre-June 2014 $100 per barrel oil prices. But since the returns of the outing have not turned out fruitfully enough, they have decided on withdrawing, and the NEB would be evaluating their "Blowout Response Plan." As per earlier plans, it would have been a two-phased exercise where the company would have applied for the drilling process, but cash flow and limited sight of future oil resources in the region are putting the company on tight ground.

Current status of BP remains interesting

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British Petroleum remains a buy, despite being a size lower than some of its competitors mentioned above. Its market capital of £74.6 billion ($116.5 billion) is dwarfed in terms of Royal Dutch Shells £208 billion ($323.85 billion), which might put it at risk considering the strategic issues at hand. With the uncertainly looming over the entire industry, experts feel that the company might be unsafe as a medium term investment, but there are clues to express otherwise.

According to sources like Forbes and IB-Times, Royal Dutch could be in the race to bid for some of the British oil major’s assets, which might sweep ion a new wave of optimism, putting in a position of a being a "buy" company. But since no confirmation has yet come through, there isn’t a credible source of attributing optimism for a price rise for BP shares on an immediate basis.

Conclusive thoughts

The first two quarters of 2015 will determine the fate of British Petroleum. If oil prices stabilize to around the $80 per barrel price bracket, British Petroleum might experience more stability, would perhaps be able to control capital expenditures more systematically, and may not also have to incur the higher the high attrition it is doing currently, and also feel easier to pay sizable dividends to its shareholders. But if, prices remain in the region of $60 per barrel, then the current scenario would be retained for a longer period of time, exposing it to takeover bids.

Also, if Royal Dutch does indeed takeover BP, it could work out well for both companies. The reason is, from profits to costs, everything would be shared, and with the current scenario, lesser costs would mean better margins for both the companies. Comparing Royal Dutch in terms of size, their buying into BP would send their shares into a rally for a short duration of time, which if capitalized upon, will cement its position as a "buy" for some time in the future. Hence, investors should stay calm and keep watching the future moves of BP.