British Petroleum Set To Rise On M&A Chatter
Considered one of the big six global energy giants, British Petroleum or BP Plc (NYSE: BP) is an integrated energy and chemicals company with a market capitalization of just over GBP 82 billion. The vertical integration of exploration, production, refining, distribution, chemical production and energy generation services make it a fierce force in the multinational energy industry. While years of bad luck and mistakes have set the company back, the company has managed to stay afloat in a particularly challenging environment considering the bear market for oil and gas. However, the near-term buyout environment could be a boon the company as it seeks to return to stronger growth after managing several threatening crises.
Strong Performance Belies Weak Earnings
BP has been one of the better performing companies of the energy sector considering the -25% loss year-to-date for Brent crude oil with London shares gaining 8.97% over a comparable period. When examined side-by-side to American giants Exxon (XOM) (-7.45% YTD) and Chevron (CVX) (-4.70% YTD), the company looks increasingly well-positioned in the business, mainly owing to the diverse roster of income producing assets. Adding to value is strong dividend growth, making BP a valuable portfolio component for investors seeking income versus share appreciation.
The company’s earnings have not been a bright spot in recent quarters owing to the drag from prices. The results from the fourth quarter of 2014 were well-off analyst expectations, coming in at $0.74 per share versus $0.82 forecast. Earnings for the first quarter of 2015, due towards the end of April, are looking particularly dicey with the consensus estimate at $0.22 versus $1.04 a year earlier. The decline in energy prices is just one factor denting the valuation as the company’s American subsidiary, which provides a substantial portion of revenue, is still reeling from Macondo claims.
Increased M&A to Boost Energy Stocks
Any industry in consolidation is expected to see increased mergers and acquisitions activity with the energy sector likely to experience a wave of related activities. In further proof that no crisis should go untapped, energy giants are taking advantage of the latest bout of softness in gas and crude prices to go on a buying spree. This comes on the heels of Dutch energy giant Shell (RDS-A) buying up BG Group (BRGYY) assets in an effort to expand the core business. The recently announced GBP 47 billion deal marks the largest acquisition activity in the industry in over a decade and will go on record as the fourteenth largest takeover of a publicly listed company. The deal helps Shell to secure its place as a global giant by increasing both production and proven reserves.
Increased transactions will bode well for the industry in general as it contends with the new pricing paradigm, with weaker companies proving prime targets for the upcoming hunt. This will likely be a positive force for valuations across the board including BP, with a rising tide lifting all ships. While BP itself is unlikely to be participating in the latest round of M&A activity as a buyer despite claims to the contrary by senior management, a stronger deal environment will make any asset sales slightly less challenging. There are also rumors swirling that BP could be a potential buyout target if the claims process from the Macondo well goes poorly. American and European energy firms flush with cash would be thrilled at the prospect of picking up BP assets on the cheap. While share prices will be buoyed by M&A In the near-term, the medium-to-longer headwinds faced by the company could upend that possibility.
Macondo Still a Drag on the Outlook
In general, BP has been a strong performer in an industry that has been overwhelmed by oversupply and mal-investment in the last few years. The main obstacle to higher growth has been the persistent drag of the Gulf deep water drilling disaster which has left the company liable for claims numbering in the billions of dollars. According to the latest estimations, the $13.7 possible price tag from New Orleans alone is well above the $2.3 billion in cash that would render the company insolvent. The equity position of the Houston-based subsidiary that managed the projects in the Gulf of Mexico has seen major write-downs amid the oil price decline, making the situation increasingly tenuous. Although the London-based BP holding company could theoretically provide internal financing to the arm, that would hurt the bargaining position as the company seeks to close this chapter in its history. However, with assets in the Gulf at near 25% of BP’s global energy production, any forced exit would have a serious consequences for the outlook.
Conclusion
A quick glance at the company’s fundamentals show a strong company, still embattled from legacy crises that have not been quickly resolved. Although hurting with the rest of industry, BP has nevertheless held its head high, with prices benefiting from industry M&A and takeover speculation. While the company’s shares are still well-off of 52-week highs like the rest of the industry, room for more upside appreciation will depend largely on the direction of energy prices. With the completion of a head and shoulders bullish technical pattern setting up since September, the current upside breakout might see prices rise back towards 500 pence per share. The main event that could drag prices lower is the earnings announcement due later this month; however, the technical and propensity for deal-making in the sector continue to outweigh other concerns.
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