Can This Leopard Change Its Oil Spots?

The Deepwater Horizon oil spill which occurred in April of 2010 is considered to be the largest marine oil spill in the history of the petroleum industry.   And is considered to be one of the largest environmental disasters in American history, as well as, killing 11 individuals. 

The firm behind the oil spill was a publicly-traded company by the name of British Petroleum (BP). 

In April 2016, BP agreed to pay $20.8B in fines, the largest corporate settlement in United States history. 

Fast-forward to the present, BP has attempted to alter its battered image and focus on being eco-friendly and carbon-conscious. 

While not headquartered in the U.S., BP consistently ranks in the top 5 integrated oil and gas stock searches amongst financial pros.

And it’s not hard to see why.

With a dividend yield of over 4%, and a solid balance sheet many investors would consider BP a core long-term holding. But declining revenues have many asking whether the firm is still a good investment.

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BP p.l.c (BP) Business 

Founded in 1908, in London England, British Petroleum carries the following brands:The bp brand, Castrol, Aral, ampm, Amoco, & Wild Bean Cafe.

Bp p.l.c operates through gas and low carbon energy, oil production and operations, customers, and products. It produces and trades in natural gas; offers biofuels; operates onshore and offshore wind power, and solar power generating facilities. 

Additionally, the company provides de-carbonization solutions and services, including hydrogen, and carbon capture, usage and storage. Furthermore, it produces and refines oil and gas, and invests in upstream, downstream, and alternative energy companies.

As an integrated oil and gas company, BP performs oil and drilling extraction, transportation, refining, and marketing.

BP generates most of its revenues from its customer and products segment, which accounts for 81% of total revenues in 2022. 

Customer and products refer to the company’s customer-focused businesses, spanning convenience and mobility, which includes fuels retail and next-gen offers such as electrification. Furthermore, it includes aviation, midstream, and Castrol lubricants. It also includes oil products, refining and trading businesses. 

Financials

One thing investors don’t like to see is revenues declining. However, that’s exactly what’s been happening in BP. For example, in 2013 the firm’s revenues were $379B. But in 2021 its revenues were $157B. 
 

A steady decline in oil and natural gas prices from fracking technology took the initial bite out of the revenues and margins. Just as they recovered, COVID and economic stoppage trampled the progress in 2020 and 2021.

Thankfully, this has rebounded on the back of higher commodity prices.

Plus, the firm increased its gross margin to 14.5% in 2021, a significant jump from 5.6% in 2020 and its best in nearly a decade. 

BP has been able to reduce its debt for 8 straight quarters. 

In 2021 the firm had a positive free cash flow of $12B. And in the first quarter of 2022, it had a surplus cash flow of $4B. 

BP has a current ratio of 1.19x. Its highly liquid assets are 1.19x greater than its short-term liabilities. It has a quick ratio of 0.65x, which means its highly liquid assets are 0.65X greater than its short-term liabilities. 

The company has a debt-to-equity ratio of 0.98, which is historically high for the firm. 

The capital structure for BP is as follows: total debt of $69B and cash upwards of $30.7B. And a market cap of approximately $95B

Valuation

BP has a price to sales ratio of 0.63X, which is significantly better than the sector median of 1.70X. 

Coupled with P/E Non-GAAP of 7.54x, which is much better than the sector median of 12.66x, and a forward price to cash flow of 2.8x, the stock looks extremely cheap, even compared to the rest of the sector.

And a 4.5% dividend yield is nothing to sneeze at either.

While margins aren’t as lofty as you might find at exploration companies at the moment, the integrated nature gives BP more balance than a straight drilling or oil and gas marketing play.

Our Opinion – 8/10

BP is one of the world’s largest integrated oil and gas companies with an operation in over 70 countries across the globe. 

However, the firm is trying to reinvent itself into a more eco-friendly and carbon-conscious firm. 

Despite shares of the stock vastly outperforming the overall market year-to-date, we believe BP will remain a strong investment over the next 12-24 months.

And while you wait, enjoy the nice dividend payouts.