BP plc - Plugging Cracks
Writing this is going to be hard. As the matter of fact it is going to be one of the hardest things we have ever done. And the reason that's so, is because we all work for a living, we all have families, and in some cases, not only have we worked in Lower Plaquemine's Parish, some of us work for big oil.
Because we have a bit of a unique perspective, we see the massive oil leak in the Gulf of Mexico as an event that will have human and ecological consequences lasting for generations, just as we know there is no amount of money that can be spent that will bring back the lives of the 11 people that perished when the Deepwater Horizon caught fire and sank.
But we understand the spirit of the people that live in that part of the country, and we know not only will they move forward with their lives in positive and constructive ways, they would want the rest of us to do the same.
Usually doing what we do is a labor of love, something we enjoy sharing with other folks that actually sweat for a living just like we do. So we hope that everyone appreciates our reticence at having waited almost three weeks to answer the numerous e-mails we received, asking if we thought BP plc (NYSE: BP) was a good investment.
We just thought a respectful period of time was required to allow the rest of the world to accept that 11 people were no longer apart of the lives of people that loved and needed them.
Financial information related to BP plc, contained in this report, is based on the company's most recent SEC Form 20-F filing for fiscal year ending December 31, 2009, as filed with the Securities and Exchange Commission on March 05, 2010.
What They Do
The company, incorporated in 1909, is an international oil and gas company operating in more than 80 countries. The company operates two segments: Exploration and Production, and Refining and Marketing.
Exploration and Production’s activities cover three key areas. Upstream activities include oil and natural gas exploration, field development and production. Midstream activities include pipeline, transportation and processing activities related to its upstream activities.
Marketing and trading activities include the marketing and trading of natural gas, including liquefied natural gas (LNG), together with power and natural gas liquids (NGLs).
Refining and Marketing’s activities include the supply and trading, refining, manufacturing, marketing and transportation of crude oil, petroleum and petrochemicals products and related services.
During the year ended December 31, 2009, it sold its interest in BP West Java Limited, Kazakhstan Pipeline Ventures LLC and LukArco. In February 2010, the company announced that Rubis acquired its France's 50% stake in Frangaz, thus becoming its sole shareholder.
Exploration and Production
The company conducts upstream and midstream activities in 30 countries with its principal areas of production in Angola, Asia Pacific, Azerbaijan, Egypt, Latin America, the Middle East, Russia, Trinidad, the United Kingdom and the United States.
Midstream activities involve the ownership and management of crude oil and natural gas pipelines, processing facilities and export terminals, LNG processing facilities and transportation, and its NGL extraction businesses in the United States, the United Kingdom, Canada and Indonesia.
Its midstream pipeline interests are the Trans-Alaska Pipeline System in the United States, the Forties Pipeline System and the Central Area Transmission System pipeline, both in the United Kingdom sector of the North Sea, the South Caucasus Pipeline (SCP), which takes gas from Azerbaijan through Georgia to the Turkish border and the Baku-Tbilisi-Ceyhan pipeline, running through Azerbaijan, Georgia and Turkey. Major LNG activities are located in Trinidad, Indonesia and Australia. BP is also investing in the LNG business in Angola.
The company’s oil and natural gas production assets are located onshore and offshore and include wells, gathering centers, in-field flow lines, processing facilities, storage facilities, offshore platforms, export systems (transit lines), pipelines and LNG plant facilities.
Upstream operations in Argentina, Bolivia, Chile, Abu Dhabi, Kazakhstan, Venezuela and Russia, as well as some of its operations in Angola, Canada and Indonesia, are conducted through equity-accounted entities.
Refining and Marketing
The company’s Refining and Marketing business is responsible for the supply and trading, refining, manufacturing, marketing and transportation of crude oil, petroleum, petrochemicals products and related services to wholesale and retail customers, marketing its products in more than 80 countries.
The company has operations in Europe and North America and also manufactures and markets its products across Australasia, in China and other parts of Asia, Africa and Central and South America.
Its organization is managed through two main business groupings: fuels value chains (FVCs) and international businesses (IBs). The FVCs integrate the activities of refining, logistics, marketing, supply and trading, on a regional basis, recognizing the geographic nature of the markets.
The IBs include the manufacturing, supply and marketing of lubricants, petrochemicals, aviation fuels and liquefied petroleum gas (LPG).
In the United States, the company owns or has a share in five refineries and markets primarily under the Amoco, ARCO, BP and Castrol brands. In Europe, the company owns or has a share in seven refineries, marketing across the primarily under the Aral, BP and Castrol brands.
The company manufactures and markets lubricants and related products and services to the automotive, industrial, marine and energy markets across the world, primarily through its major brands of Castrol and BP, and also the Aral brand in some specific markets.
BP marine lubricants are a supplier of lubricants to the marine industry, supplying many types of vessels from bulkers to container ships to dredgers and cruise ships, with global presence in over 850 ports.
The company's industrial lubricants business is a supplier to those sectors of the market involved in the manufacture of automobiles, trucks, machinery components and steel and the company is also a supplier of lubricants for the offshore oil and aviation industries.
The company's petrochemical operations consist of a global Aromatics & Acetyls business and an Olefins & Derivatives (O&D) businesses, predominantly in Asia.
The company competes with ExxonMobil (NYSE: XOM), Chevron Corporation (NYSE: CVX) and ConocoPhillips (NYSE: COP).
The stock price is currently almost 14% below its 13 day moving average, 40% below its 50 day moving average, and almost 50% below its 200 day moving average. The stock price will find support at $36.20, a 3% decline from its recent $37.16 close.
We believe that recent minor successes in the Gulf of Mexico will only serve to keep short term investors on the fence, since the trend lines, like tea leaves, are a bit hard to read with all of the controversy currently surrounding the company, controversy we expect to continue through the summer months.
Long-Term (5 Year Hold) Investment
The company's FY09 financial statements are, in our opinion, not all that impressive, and of the 17 metrics we like to focus on, only 10 were what we would consider investment quality.
Certainly with the stock price so beat up of late, the company's dividend yield has increased and is currently above 9%. Likewise the company's FY09 earnings yield has increased and is currently above 18%, almost double that of its competitors.
But aside from the earnings yield, there really is little difference in the FY09 financials of any of the company's in the sector, leading us to wonder what the long-term investment attraction might be.
Based on our preliminary review of the company’s FY09 financial information, we think a Reasonable Value Estimate for the stock is in the $68 to $72 range, and while there may be great swings in the stock price over the coming months, we don't see these price swings as being material to our valuation estimate since the company generates more than enough cash to pay any and all claims arising from the Deepwater Horizon incident.
The events of the past 45 days have been horrific, and as the days and weeks pass, more and more images will be produced reminding many Americans why they distrust "big oil".
Certainly, in our opinion, the leadership of BP is as inept as any we have ever seen when it comes to transparency, having watched with our mouths open as BP leadership told lie after lie as evidence to the contrary was being broadcast to the world.
But the main issue for us are the families of the 11 workers killed in the incident, as well as the families that have lost and are loosing their livelihood and way of life because of the willful disregard for operational safety displayed by BP.
Which makes us wonder. If the company is that uninterested in the safety of its workers, why would it be concerned about the safety of its shareholders.
To download the BP plc Raw Value Worksheet, please click here.