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BP plc - Plugging Cracks

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June 06, 2010 – Comments (7) | RELATED TICKERS: BP , XOM , COP

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.

Basis

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).

Short-Term Investment

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.

Valuations

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.

Final Thoughts

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.

Wax

Worksheet

To download the BP plc Raw Value Worksheet, please click here.

7 Comments – Post Your Own

#1) On June 06, 2010 at 11:18 AM, Teacherman1 (28.84) wrote:

Good post WAX as usual, and while it contains useful, exhaustive information, you managed to focus on things other than money.

Have a nice weekend. 

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#2) On June 06, 2010 at 11:42 AM, wax (97.63) wrote:

Thanx Teacherman. Money is nice to have, but regardless of how it's earned, there is a human cost that we all take for granted.

Wax

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#3) On June 06, 2010 at 5:48 PM, MegaEurope (< 20) wrote:

I wonder if they are considering changing the brand to Amoco in the US?  BP was a very good brand, but I think we will see significant problems at the retail level.

(I know BP gas stations are franchised, but assume BP still has some exposure to gasoline sold under their name.)

I read an article the other day about the possibility of BP getting bought out.  Extremely unlikely of course.  But maybe BP and Shell could end up merging their US operations.

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#4) On June 06, 2010 at 8:06 PM, wax (97.63) wrote:

MegaEurope;

I noticed the same article myself and it made me smile.

For a very long time this rumor seems to come to the fore every time one company or the other gets into some sort of situation.

Prior to this incident, BP was going to buy Shell when it was learned that Shell did not the proven reserves they claimed.

It makes for great press, put I seriously doubt Shell or any other company has the cash to purchase a company the size of BP, especially since it would do nothing to increase the markets they now serve.

Wax

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#5) On June 07, 2010 at 4:22 AM, Tastylunch (29.40) wrote:

  wax

>>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  valulation question in my mind Wax is not cleanup costs (which will be immense I'm sure), but the future costs of doing business. BP isn't going to have a free hand going forward and may see quite a bit more gov't intereference/enforcement interest. They may even see some of their ventures prohibited altogether.

In any event I agree with you BP clearly only cares about senior management. Their callous disregard for their employees, human life and their enivornment/community make them an usafe investment. I just read an article that said BP was responsible for over 90% of all reported safety violations in the entire industry last year. Primarily coming from their refineries. So this appears to be a deeply ingrained cultural aspect to BP not just an isolated incident at DeepWater.

Where's there's one cockroach...

Nice writeup Wax. I'm glad to see you finally get some rec love, eventhough the topic is a somber one.

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#6) On June 07, 2010 at 4:48 AM, wax (97.63) wrote:

Tasty;

You are right, BP may not have a free hand in the future, but you have to realize that neither will any of the other majors either.

In the end the government will screw it all up, and BP and the others will simply shift their upstream budgets to other countries, making the price of oil more expensive.

Then when Sally the Voter gets a belly full of $7 or $8 a gallon fuel and marches into the voting booth and gets rid of yet another inept administration, things will change.

But by then folks on fixed incoms will be impacted, and well, it's just going to be a mess. I suspect it will take OSHA at least 10 years just to figure out what needs to be done to protect the workers.

As to safety, I work for a major oil company, and since the BP Texas City incident, we have been through every single safety interlock where I work, all 660 of them, and every one has been updated and every one has been tested.

We now test each one at least once every three years, and more frequently if OSHA requires. It is a massive undertaking and one that as you can imagine, never stops.

Since we have adopted this philosophy, people have been terminated for safety violations. So at least where I work, we take process safety very very seriously.

As to rec love, well we just hope the information we present is useful. We figure if it helps one person stay out of the ditches, it's all been worth it.

Sure recs are nice, but since we pay little attention to current events and write about them even less, we don't really expect to get many of them.

Thanx for your thoughts Tasty, they are always appreciated. 

Wax

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#7) On June 07, 2010 at 11:56 PM, Tastylunch (29.40) wrote:

>>You are right, BP may not have a free hand in the future, but you have to realize that neither will any of the other majors either.

true. I just assumed the enforcement going forward might be applied a little unequally whether intentional or not.

>>In the end the government will screw it all up,

Yeah they've been a bit dumber than typical in the whole mess. It's pretty clear that if they had to handle it on their own they couldn't. I wonder if Salazar will survive it.

The whole oversight/approval process sounds broken to put it lightly. I'm not sure there is a singulary responsible bad actor in this whole process. The whole thing to me looks more likea systemic failure that was waiting to happen.

>>As to safety, I work for a major oil company,

Ah cool! I defer to your opinion then.

Yeah it's sad how the whole industry has been tagged for what likely a pretty bad rogue company. I never went to work in Oil but I had a bunch of classmates who did. The practices I've seen described as BP has been doing is stuff other operators would never dream of doing from what my friends have told me.

>>Thanx for your thoughts Tasty, they are always appreciated.

Ditto!

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