(NYSE: BP) How BP will sustain itself in the face of low oil prices and the oil spill settlement
European energy giant BP plc (NYSE: BP) is in a deeply troubled position. The company is facing a number of structural headwinds, encompassing everything from lower oil prices, exposure to geopolitical risk through its investment in Russian energy production, and a massive financial penalty pertaining to the 2010 Gulf of Mexico oil spill. This has greatly weighed on BP’s stock price over the past year.
However, BP remains profitable, and has enough financial flexibility to sustain itself during the downturn. This article will discuss BP’s current position with the Carbon Disclosure Project, and the levers it can pull to stay afloat within a horrible operating environment.
BP and the Carbon Disclosure Project
The Carbon Disclosure Project, or CDP, aims to revolutionize the business world response to the threat of climate change, and seeks to promote the responsible use of natural resources. CDP has brought together a variety of stakeholders including shareholders, customers, and governments to incentivize companies to disclose their environmental data. CDP then issues companies a score and grade depending on the results.
BP has not been an active respondent in these areas. In 2015, BP did not submit a response to the CDP on the issues of water and forestry. This is disappointing, since the water and forest reports inform investors of a company’s commitment to the issues of water scarcity and deforestation.
BP did submit a response to the 2015 climate change report, but its response has not yet been published. Investors have to go back to last year to find published responses, and even then, the results were not favorable. BP received a score of 80 for the 2014 climate change report, which resulted in a ‘B’ grade. Their low environmental grade may underscore their financial situation.
BP Earnings Collapse
Last quarter, BP reported $1.8 billion of net profit on $55.9 billion of revenue. Revenue fell 41 percent year over year, not surprisingly due to the crash in oil prices over the past year. Also not surprisingly, this was primarily due to the decline in oil and gas prices over the past year. BP’s upstream segment, which includes its oil and gas exploration and production activities, saw profits fall 79 percent last quarter, year over year.
Investors presumably want to know how BP can sustain itself in the face of so many headwinds, which include collapsing oil prices, the massive financial penalties stemming from the 2010 oil spill in the Gulf of Mexico, and its significant investment in Russian oil production. While it may seem that the cards are certainly stacked against BP, the company does have a plan to survive this brutal operating climate.
How BP Will Sustain Itself
First, BP is aggressively cutting costs and selling off assets to raise cash. BP expects to spend $19 billion this year on capital expenditures, down from previous expectations of $20 billion in 2015 spending. Going forward, the company plans to reduce capital spending even further, to $17 billion-$19 billion per year through 2017. Moreover, BP is on track to divest $10 billion in assets this year. It has already planned another $3 - 5 billion in divestments next year, and at least $2 billion per year thereafter.
Second, it is important to remember that BP’s settlement with the U.S. will be spread out over a long period of time. BP agreed to the terms of the settlement because the company’s long-term survival will not be threatened. BP will pay $18.7 billion, to various entities, which was about the maximum penalty allowed under the Clean Water Act. This includes agreements with the states of Alabama, Florida, Louisiana, Mississippi and Texas, and also includes settlements of claims made by more than 400 local government entities.
Of the $18.7 billion, BP will pay the United States a civil penalty of $5.5 billion under the Clean Water Act, $7.1 billion to the United States and the five Gulf states for natural resource damages, $4.9 billion to cover economic and other claims made by the states, and lastly up to $1 billion paid to the 400-plus local government entities. The key point to remember is that the penalties will be spread out over 18 years. That amounts to approximately $1 billion per year, which puts the fines into a different perspective. BP generates enough profits to absorb this annual payment, and will raise even more cash going forward through asset sales and cost cuts.
Lastly, BP remains committed to a long-term stake in Russian energy production. It is easy to see why, as supplies of available natural resources are abundant in Russia, and the country is one of the premier emerging market nations in the world. BP holds an approximately 19 percent stake in Russian energy producer Rosneft, and even though commodity prices are down, this equity stake still pays BP significant earnings. BP received an annual dividend of $271 million from Rosneft last quarter.
Companies to Watch
* There are a number of Big Oil companies reporting earnings over the next few weeks. These include other European oil majors such as Royal Dutch Shell (NYSE: RDS.B) and U.S. based Exxon Mobil Corporation (NYSE: XOM).
* Investors should take an overview of their respective earnings reports to determine how these companies are responding to the prospect of sustained low oil prices.
Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance and an MBA in Finance.