BP 455.5p Questor says HOLD
1. Spill woes coming to a head
The clock is ticking ahead of BP’s civil trial in the US, which is due to start on February 25. The oil group had hoped to settle lawsuits over the 2010 Gulf of Mexico spill ahead of that date, but it looks less likely now after the states of Louisiana, Alabama, Mississippi and Florida demanded $34bn (£21.5bn) for economic and property damage under the Oil Pollution Act (KOSDAQ: 131400.KQ - news) . BP says these are “overstated”. Separate talks are under way with the federal government over a Clean Water Act liability.
All in all, the total bill could now come to $90bn, BP revealed at its full-year results presentation. The numbers were ahead of expectations, with underlying profit falling by a fifth to just under $4bn.
= 2. Shrinking to grow again =
BP was once the second-largest oil company in the world, but is now the smallest of the four global oil majors. It is selling its 50pc stake in its troublesome TNK-BP joint venture to Rosneft.
In return it will have a near-20pc stake in the Russian energy group, as well as more than $12.3bn in cash. This should complete in the second quarter after Russia waved through the deal. BP has also sold $37.8bn of assets since the spill to fund the fines and compensation, and it has taken a charge of $42.2bn in its books. Its balance sheet remains strong, with the cash from the Rosneft deal positive for future dividends. BP and Shell (LSE: RDSB.L - news) are diverging in strategy, with BP more focused on oil and Shell more focused on gas.
= 3. Looking to the future =
For future growth, it is not only Arctic exploration with Rosneft that is in the driving seat, although prospects here are exciting. This year, four new projects are expected to start pumping oil, with six starting in 2014. By 2016, analysts see an additional 550,000 barrels of oil equivalent per day (boepd) of production. About 25pc of this will be from Angola, 17pc from the North Sea and 15pc will come from the Gulf of Mexico.
For 2013, total production is expected to fall by about 150,000 boepd, but this reflects the impact of disposals. When these assets are stripped out, production is expected to rise. This year, BP’s tax rate is expected to rise to 37pc from 30pc.
= 4. Trial is the major risk =
BP is expected to return about $4bn of the cash from the Rosneft transaction to shareholders, but we will probably have to wait until the Macondo trial is over.
BP plans to increase cash flow by 50pc by 2014, based on a $100 oil price. Management plans to increase the dividend in line with “underlying earnings and the improving circumstance” of the company.
The fourthquarter dividend was flat quarter on quarter, but there is likely to be plenty of scope to increase the payout.
The shares are cheap, trading on a 2013 multiple of 8.3, falling to just 7.3 next year, but this reflects the US uncertainty. With a prospective yield of 5pc rising to 5.3pc, Questor keeps a hold.