With Gulf Spill Settlement Looming, Now Might be the Time to Own Shares of BP (BP)

August 6, 2012 12:56 PM EDT
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Price: $37.44 -0.58%

Rating Summary:
    16 Buy, 11 Hold, 2 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 35 | Down: 31 | New: 10
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Shares of BP (NYSE: BP) are trading flat on a two year chart. Shares of Exxon Mobil Corporation (NYSE: XOM) are higher by over 41 percent over the same period. In the wake of the Deep Water Horizon oil spill in April of 2010, the divergence in valuation between Exxon and BP isn't a surprise. After all, it was the largest gulf spill in history and the environmental damage was massive and liabilities difficult to assess.

BP is now on the verge of a settlement with the U.S. government regarding the spill and this would remove a major uncertainly in the stock and could boost the stock's value, according analysts at Oppenheimer. The bulk of the remaining liabilities involve federal, state and local governments, including environmental penalties, for which BP reserved $3B. For the record, each additional $1B payment has a $0.50/ADR impact on earnings.

BP also continues to make progress on executing its business strategy, which was implemented by its new CEO following the Macondo oil spill, said analyst Robert Du Boff, of Oppenheimer.

"The company is addressing its priorities of reaching a final settlement in connection with the spill, stabilizing and growing its production and reserves, and restructuring and rebuilding its assets portfolio with a focus on value creation," said Du Boff.

"We believe reaching a fair and reasonable settlement with the US government regarding the oil spill would remove a major uncertainty and should boost the stock. We also believe the sale of its 50% stake in the Russian oil company, TNK-BP, could generate more than $20B, which may be used to create value for the shareholders. We have updated our estimates to reflect updated cost and production guidance."

Based on benchmark oil and gas prices, Oppenheimer estimates BP will generate operating cash flow in excess of $30.9B, which is sufficient to fund $22B CAPEX and a $5B dividend. BP sold assets for $24B since 2010 and expects another $14B before the end of 2013.

BP ADRs have declined 4 percent this year. This compares with its peer group which has traded flat, so all and all it could be one of the more compelling names in the space, especially if BP reaches a reasonable settlement with government agencies.

Oppenheimer has a Buy rating on BP and a $55 price target.

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