FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 26 May 2016

Taking The Measure Of Battered Petroleum

by Robert Rapier, Investing Daily

Investing Daily Article of the Week

Last week I attended Investing Daily's Annual Investing Summit in Las Vegas. I gave a presentation and my colleague Igor Greenwald and I hosted several question-and-answer sessions about the energy sector with attendees.

There were three questions that came up a lot during the sessions:

  1. What is the expected impact of Saudi Arabia replacing their minister of petroleum?

  2. What is your outlook for oil and gas prices for the rest of the year?

  3. Do you still think BP is a takeover target?

I want to address the question about BP (NYSE: BP), as it was the one that was asked most frequently, and in a number of variations. So I told some of the attendees that I would provide an update.

BP is one of the world's six publicly traded, integrated oil companies known as the "supermajors." The London-based company's origins go back over 100 years, and it was initially formed to develop oil discoveries in Iran. Over the ensuing century the company that would eventually change its name to British Petroleum in 1954 transformed into an integrated, global powerhouse.

In the modern era, BP tried to portray itself as a different kind of oil company. In 2000, "British Petroleum" launched a high-profile public relations effort to rebrand the company as the environmentally-friendly "Beyond Petroleum." They made some investments in alternative energy, but that never amounted to more than a small fraction of BP's investments or revenue.

Despite BP's attempt at rebranding, its image was seriously tarnished over the past decade. In 2005 an explosion at the company's refinery Texas City, Texas killed 15 people and injured 170. That disaster cost BP well over a billion dollars, damaged the company's image and ultimately resulted in the sale of the refinery to Marathon Petroleum (NYSE: MPC).

An independent safety review of the accident was conducted by former U.S. Secretary of State James Baker. His report cited "a corporate safety culture that may have tolerated serious and longstanding deviations from good safety practice."

Those issues were not fixed by 2010, when the Deepwater Horizon offshore platform explosion killed 11 workers and spilled nearly 5 million barrels of oil into the Gulf of Mexico. BP's market capitalization was cut in half over the course of about two months. I had never recommended BP to investors before, and I continued to recommended that investors avoid the stock as the company shed assets worth tens of billions of dollars to meet financial obligations related to the spill.

But there eventually came a point at which I felt the stock was oversold. BP ultimately became so cheap that I finally did something I had never done before. I started recommending it to investors because BP's market capitalization seemed to be far below fair value even considering the potential financial liabilities of the Gulf spill.

I also made a prediction at the beginning of 2015 that BP would be bought or merged that year. I called that "my most aggressive, wild card prediction for 2015." As we know, that didn't happen, but I still think it can. There are certainly antitrust issues that would be raised, and the UK government would very likely oppose such a move. BP remains a very big bite to swallow, with only two or three of the largest supermajors capable of pulling off such a transaction.

But here is the argument in favor of a takeover. Below are some of the important financial metrics for the six supermajors:


  • EV - Enterprise Value in billions of U.S. dollars as of May 16

  • SM - Standardized Measure, the present value of the future cash flows from proved reserves as of year-end 2015, in U.S. dollar billions

  • EBITDA - Earnings before interest, tax, depreciation and amortization for the trailing 12 months (TTM), in billions

  • FCF - Levered free cash flow for the TTM, in billions

  • Res - Total reserves at year-end 2015 in barrels of oil equivalent (BOE)

There are several noteworthy data points in this table. One is that while BP looks expensive according to the EV/EBITDA and Debt/EBITDA ratios, these are partly a reflection of some of the financial obligations from the Gulf spill. Last year BP settled with the U.S. federal and state governments over its liabilities stemming from that spill, agreeing to pay $18.7 billion over 18 years to settle the claims.

Looking ahead, though, the estimates for BP's EBITDA are $20 billion in 2016 and $26 billion in 2017 (in line with historical levels). If we utilized this year's projected EBITDA in the table above, BP's EV/EBITDA and Debt/EBITDA ratios drop to 6.5 and 2.7, respectively. This would make it cheaper than its peers on an EV/EBITDA measure, and in line on the debt metric.

But what really stands out is BP's EV/Reserves ratio. What this means is that if you divide BP's enterprise value by its total reserves, you get $7.69 per BOE. Why might a company like ExxonMobil (NYSE: XOM) be attracted to that? Because ExxonMobil's own reserves are on the books for $16.80/BOE. ExxonMobil could increase its reserves by nearly 70% at a much lower cost than its current reserves, and it would get BP's substantial refining assets and huge oil and gas trading group.

There is perhaps an even more compelling argument for a merger/takeover from Chevron (NYSE: CVX) or Shell (NYSE: RDS-A), which could substantially dilute the cost of their own $20+/bbl reserves while creating a company that could rival ExxonMobil in size. Neither competitor has quite the deep pockets of ExxonMobil, but they are both valued roughly twice as much as BP.

The last time I did this exercise, BP's EV/Reserves ratio was $8.51/BOE. Today, it's even cheaper than that. I still view the company as a takeover candidate based on the low value the market is placing on its oil reserves, and I continue to believe that BP is trading well below its fair value.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Investing


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
A Short Note on a Connection Between Marginalist Economics and Folk Medicine
Run A High Pressure Economy? Janet Yellen Does Not Understand the Problem
News Blog
Early Headlines: Asia Stocks Down, Oil Lower, Great Lakes Wind Power, Chinese Moving Mfg To US, Tesla Reports Profit, Dems Forecast To Take Senate, China's Debt And More
How Miller Stacks Up Against His Draft Class
Inside The Machine: How Two Nobel Winners Taught Us How Companies Tick
Healthcare's Dirty Little Secret: Results From Many Clinical Trials Are Unreliable
The Cleveland Indian's Unique Use Of Andrew Miller
What We Read Today 26 October 2016
Why Do So Many Price Tags End In .99
September 2016 New Home Sales Improve.
Higher GDP Growth In The Long Run Requires Higher Productivity Growth
Quantum Encryption Is Secure Because Information Encoded In A Quantum Particle Is Destroyed As Soon As It Is Measured
The Stock Market Is Up, But Mutual Fund Investors Are Fleeing
Infographic Of The Day: Google's Hidden Games
Early Headlines: Asia Srocks Mostly Lower, Energy HY Bonds Surge, Google Fiber Cutback, Shadow Banks Dominate Mortgages, NATO Crowds Russia, Coffee Surges And More
Investing Blog
Thirsty For Income? How To Thrive In This Yield Desert
Apple's First Annual Sales Decline In 15 Years
Opinion Blog
A Hard Brexit And Reduced Migration Won't Benefit UK Workers
What Triggers Collapse?
Precious Metals Blog
Inflation Surging As Platinum Signals Stock Market Decline
Live Markets
26Oct2016 Market Close: US Markets Close Lower, Boeing Shares Up, Texas Tea Stabilizes In Low 49's, Gold Falls To 1266, Friday's Fed Rate Change Promises To Be A Game Changer
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

Crowdfunding ....



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved