Is BP really back?
It's certainly profitable, but unresolved spill liabilities still keep it risky.
By Aaron Levitt
What a difference just a year and half makes. It's been roughly 19 months since BP's (BP) Deepwater Horizon rig disaster. The resulting explosion killed 11 workers and created one of the worst oil spills in recent history. Since then, it's been a long, hard climb for the integrated oil major.
However, BP's Tuesday earnings report points to improved results and a potential turnaround. But with legal liabilities from the Gulf of Mexico spill still hanging over it, the question remains: Is BP a buy?
BP posted an increase in its fourth-quarter profits. "Clean replacement cost profit," which strips out gains/losses from inventories and other nonoperating items, rose 14% for the period to $4.99 billion, compared with $4.36 billion for 4Q 2010. This figure was above analyst expectations for $4.88 billion.
BP's quarterly profits were driven by high oil and gas prices and solid production volume. Throughout the period, the company was able to sell oil at an average of $101.84 per barrel and natural gas for $5.07 per 1,000 cubic feet. Natural gas in Europe trades for significantly higher premiums than in the U.S.
Production volumes declined during the quarter as BP idled several rigs for maintenance and sold some assets to cover costs from the Gulf disaster. Like many of the other integrated oils, BP saw poor performance from its refining division. This segment posted a profit of $564 million, down from $964 million in the year-ago quarter. The lower result reflects the squeeze on refining margins. This was also the first time in more than a year that BP has managed to beat European rival Royal Dutch Shell (RDS.A, RDS.B) in quarterly adjusted earnings.
Aside from the increase in quarterly profit, BP made its long-suffering shareholders happy by raising its dividend by 14% to 8 cents per share as of 4Q 2011. After suspending distributions in 2010 because of the spill, the energy company reinstated the payouts in 2011.
Overall, CEO Robert Dudley said of the earnings report, "As we move through 2013 and 2014, we expect financial momentum will build as we complete payments into the Gulf of Mexico Trust Fund, restore high-value production and bring new projects on stream."
While BP's latest results put it on par with other majors like Exxon Mobil (XOM), it still must deal with unresolved liabilities resulting from the spill. While the company will complete its share of payments to the trust fund set up for claims, plenty of financial hiccups could be waiting. Two U.S. government investigations have placed most of the blame squarely on BP, suggesting that it will likely face the largest share of any fines levied. Already, BP has paid out more than $7 billion in claims to third parties.
Still more could be brewing. At the end of January, U.S. federal judge Carl Barbier ordered BP to uphold a clause in its contract with rig owner Transocean (RIG). That clause essentially shields the driller from compensatory damage claims related to the oil spill. BP is appealing the ruling, but it's increasingly possible that it will be on the hook for the entire $42 billion cleanup bill.
In addition, the main civil trial in New Orleans will begin in less than three weeks. While Dudley said BP was willing to settle "on fair and reasonable terms," what BP and courts decide is "reasonable" could be completely different things. BP's pretax charges for the spill totaled more than $37.2 billion in 2011.
Shares of BP do trade at cheaper multiples than other European rivals such as Total (TOT) or ENI (E), and it may be tempting to buy BP given the recent upshot in earnings. However, the Gulf spill liabilities overhang is still scary. With litigation and penalties remaining a major issue, investors may want to pass on the shares.
The recent earnings announcement is good, but not good enough to cover BP's Gulf problems. You can find plenty of other strong majors without this overhang.
As of this writing, Aaron Levitt doesn't own any of the shares mentioned here.
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