Oil Woes Adding To BP's Blues

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Jan 23, 2015

British Petroleum Plc. (BP, Financial) is one of the largest oil exploration companies of the world operating in 80 countries. The company is known for its path breaking technology in Oil exploration. The company has huge business interest in USA and generates approximately $143 Billion in positive annual impact on the U.S. economy. As of 2014, the company helped generate and support 220,000 jobs in America.

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Troubled waters

BP has been in troubled waters due to the murky episode of oil spill after the Deepwater Horizon Rig well blew up in the Gulf of Mexico in 2010. The offshore spill led to 3.19 million barrels being let out in the Gulf of Mexico, killing 11 workers and affecting the marine life in the 1,100 miles stretch of beach, marshes and mangroves across the Gulf of Mexico. The resultant proceedings in the U.S. State District court found BP guilty and therefore liable to penalty under the Clean Water Act (CWA). The max penalty of $13.7 Billion has been levied on BP. But the opening statement by the judge indicated that the company may be allowed the flexibility to pay the amount in installments over the next few years. This figure is lower than the estimated fine of $17.6 billion towards the government’s estimation of 4.09 million barrels oil spill. BP has set aside $42 billion for cleanup and penalties. Of this amount it has utilized funds to clear 810,000 barrels under the cleanup drive. Unfortunately this forms only 5% of the total oil spill cleared from the sea, and 95% still remains in the environment. BP is reviewing the court ruling.

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Stock’s health

40% of the company’s publicly traded shares are currently listed on U.S. stock exchange. The current EPS is close to $3. The stock is currently trading at a little over $38. Around the same time in 2010 the stock was trading in $60 range. The company competes with Exxon Mobil Corporation (XOM, Financial), Chevron Corporation (CVX, Financial), Conoco Philips (COP, Financial), TOTAL SA (TOT, Financial) and some other prestigious oil exploration and energy companies.

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Global scenario and future

The global energy consumption is expected to grow by over 40% in next 20 years which is 10% to 15% less as compared to the last 20 years. The retrospective demand for crude oil has been slowing down as compared to the global economic growth. One of the key reasons for this is the application of energy efficient technology. 95% of future growth demand will be driven by emerging economies of China and India will be driving the future growth. On the brighter side, the company is adapting to the new world order and nature of demand. It is applying robotic technology and other advanced technological to study different reservoirs and extract oil at a nominal cost per barrel. This investment in the technology has allowed BP the flexibility to work 24 hours a day, 365 days of the year reducing its dependence on human resource thereby cutting the cost.

The reduced maximum penalty of $13.7 billion as against the estimated max penalty of $17.6 billion has come as a good news for BP as it would now need to cough out a few less billion dollars towards the CWA penalty. But the entire episode has caused a great deal of distress on the company’s balance sheet because BP has already kept aside $42 billion for cleanup, and the penalty imposed by the U.S. court of law has only widened the hole in BP’s pocket. BP’s decision to review the court ruling and try to push for a reduced fine indicates that the chapter is not yet closed completely. The southward direction of oil prices has anyway affected oil companies and the investors; the Gulf oil spill fiasco has only made the matters worse for BP.

Our take

All does not look well at BP’s end, and it seems that BP is now too pressed against a number of issues. Nevertheless the size and expertise of the company makes it less susceptible to a total breakdown, and it would be interesting to watch how BP comes out clear of all the haze that it is currently witnessing apart from the heat of the southbound crude oil prices. As an investor it would be best to keep a distance from the energy giant until the time it steers clear of its impending issues and crude prices take an upturn. After the issues at BP’s end are resolved, one can use the dip in price due to the slump in crude prices to build up fresh position in the energy honcho and wait for the crude market to rebound.