BP: BP’s turnaround story is turning out painfully slow. Even the triple-digit oil price could not prevent the UK oil major from missing expectations in the first quarter. BP’s shares still look cheap. However, without further strategic clarity, particularly in Russia, they may stay that way.
BP benefits more from the bumper oil prices as it is less exposed to gas production than some of its peers. Its refineries in the US also process cheaper WTI oil, helping it take advantage of the discount to the Brent variety. Indeed, the refining and marketing business reported its strongest quarterly profit since 2006, according to Citigroup.
In contrast, production dropped 11 per cent, due to asset sales and the moratorium on drilling in the Gulf of Mexico, where BP is the biggest operator. A one-off deferred UK tax charge of $683 million didn’t help. The cost of the Gulf spill rose by $400 million to take the total to $41.3 billion before tax, though incremental bills are getting smaller.
BP’s turnaround story relies on trimming its portfolio to focus on higher growth exploration assets — the so-called “shrink to grow” strategy. The shrinking part is still on track: BP has so far sold $25 billion of assets at good prices. But, it is not yet clear where the growth will come from. Its big comeback in Russia — exploring the Arctic along with a share swap with Russia’s Rosneft — has been blocked by its oligarch partners in its Russian joint venture, TNK-BP.
Any resolution to the impasse, including buying out the oligarchs, will be costly.
At less than six times next year’s earnings, BP shares trade at a 20 per cent discount to other European oil majors, according to Credit Suisse. Even assuming that BP is found to be grossly negligent in the Gulf of Mexico spill — which would lift the company’s after-tax bill to about $50 billion — the discount looks too steep. It partly reflects BP’s weakened state following its Russian setback.