This year has been an awful one for BP, but with the first relief well finally “killing” the Macondo well, investors can now make a reasoned assessment as to whether the shares at around 430p represent good or bad value.
The aftermath of the Gulf of Mexico accident has seen the company change significantly. Not only does it have its first American-born CEO, it will have a more conservative balance sheet and a reduced level of production.
BP is now gradually getting back to normal however, and part of that “normalisation” process is resuming paying the quarterly dividend which looks likely to take place in the first quarter of next year.
This will mark a significant step in the rehabilitation of the stock in the eyes of many investors.
Even so, the first six pages of BP’s Q3 results – released in early November – were dominated by comments on the Macondo incident, although there is little new news on the US government investigations.
There were also four pages of Legal Proceedings at the back of the results, not all of which were associated with the Macondo incident.
The underlying performance in Q3 was solid with downstream and upstream divisions performing well, despite the constant reminder of the accident.
“Clean” earnings per share were 30% better than forecast, but that was due mainly to a “one-off” tax benefit. The biggest positive surprise was in the downstream, with a particularly strong performance in petrochemicals.
However, it was Macondo which dominated the results and the subsequent analysts’ conference call.
BP has so far set aside $40billion for the incident, including $7.7billion in the quarter resulting from the delay in finally shutting down the well, the decontamination costs for the near 7,000 vessels used in the surface response plus an unspecified amount for future liabilities.
The $40billion put aside is based on BP’s 100% share of the liabilities, including the Clean Air Act. The bill for its partner’s (Anadarko and Mitsui) 35% share has risen to nearly $4.3billion and BP is adamant that this figure is contractually recoverable.
The outlook statement was mixed.
In addition to the normal production turnarounds in the North Sea and Angola, production in the final quarter will be impacted by 100,000 barrels of oil equivalent per day (boepd) from the disposal programme and more than 50,000 boepd from the moratorium on drilling in the Gulf of Mexico.
The fourth quarter is seasonally quiet on the downstream side, although management is not expecting a repeat of the 71% drop in the global refining indicator last year.
It was a tough quarter too for the exploration and production division with production down more than usual from the seasonal maintenance effects and the first stage of the $30billion disposal programme.
Oil production was lower, but gas production outside the US was up over 10%.
The downstream division was slightly better than expected and helped a strong performance outside the US, where profits were up both year-on-year and quarter-on-quarter. A strong performance by petrochemicals was a feature.
The US business was much improved from capacity constrained loss-making Q3 of 2009. However, unlike Royal Dutch, its trading profits were lower in the quarter. BP’s other business and corporate division was more or less flat with Q3 last year.
The increased charge for Macondo is disappointing, but BP has managed to remain in profit.
Moreover, it has only increased the gearing by 2% and is contemplating an increase in capital spending and a resumption of dividend payments next year. This speaks volumes of the financial strength of the company.
BP is going to look very different, but hopefully much stronger in 18 months’ time. It will have a lower production base, but that production will be higher quality and the downstream will be reaping the benefits of five years of reconstruction.
We believe that the shares at around 430p could prove to be good value, especially with the prospect of the dividend payment resuming early in 2011.
Mark McCue is a divisional director with investment management and financial planning specialists Brewin Dolphin.
Past performance of shares is not a guide to future performance. The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd.
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