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BP’s Bright Future Keeps Getting More Distant

Spill-related costs keep climbing, pushing a turnaround further away


While Chesapeake (NYSE:CHK) seems to have made the final necessary step toward recovery, fellow perennial whipping-boy in energy BP (NYSE:BP) seems to be still haunted by the ghosts of the Deepwater Horizon disaster.

With an oil spill trial looming in the distance, the integrated giant’s latest earnings report was less than stellar. Lower production and higher costs caused the shrinking firm to realize much lower profits than a year ago. While it still beat Wall Street expectations for the quarter — and subsequently saw its shares rise — much of the BP story should be about moving past the Gulf oil spill and getting back to business of producing energy.

The latest earnings release does nothing to show the energy firm has done that, especially with more litigation on the way. Another day, another quarter — and BP seems to still be kicking the can down the road. BP might stay on investors’ no-buy lists, even as some its partners in the Deepwater Horizon well have moved on.

Lower Earnings

The smallest of the four “oil majors” by market value — Exxon (NYSE:XOM), Chevron (NYSE:CVX) and Shell (NYSE:RDS.A; NYSE:RDS.B) are the other three — BP turned in an adjusted net profit of just $3.98 billion. That’s down from $4.99 billion a year earlier. Operating profit for the full year came in at $17.6 billion, down 19% from 2011. Analysts attributed the 72% drop in profit to one factor: dwindling oil and gas production.

Since the worst oil spill in history, which killed 11 workers and released approximately 5 million barrels of crude into the sea, the former giant has undergone a series of asset sales to prepare itself for the pending litigation, fines and cleanup fees. From refineries to shale fields, BP has conducted a yard sale of energy assets. Since 2010, it has sold roughly $37.8 billion worth of properties and has placed $42 billion in a fund for spill provisions.

While most of those sales have been noncore assets, BP has begun to sell “kitchen sink,” so to speak.

Back in September, it sold a group of profitable oil fields in the Gulf of Mexico to Plains Exploration & Production (NYSE:PXP) for $5.6 billion, and its recent sale of its interest in TNK-BP was a huge money maker. That joint venture provided about 25% of BP’s total output — roughly 1 million barrels per day. Excluding TNK-BP, the oil and gas fields that BP has sold since the spill would have accounted for about 500,000 barrels per day in production and about $5 billion in pretax earnings.

Those asset sales are starting have a real effect on production numbers. Overall, BP’s production slipped roughly 7% this quarter and is still well below its major rivals. As we’ve said before, replacing lost production is critical for the larger oil firms if they want to stay alive. Analysts already expect production to drift lower this year as well. BP is simply shrinking too fast as a result of the spill-related asset sales.

BP Chief Executive Bob Dudley said of the firm’s latest dour report: “We will continue to see the impact of this reshaping work in our reported results in 2013. By 2014, I expect the underlying financial momentum to be strongly evident.”

I’m not so sure that will take place because things are about to get worse for the firm.

$90 Billion in Claims

Later this month, the civil trial over the Deepwater Horizon accident is due to start in New Orleans. That will involve federal, state and local authorities, as well as private individuals and businesses bringing action against BP and other companies involved in the disaster. According to early analyst projections, that trial could result in penalties of about $20 billion. That was before the detailed claims were published.

As reported by the Financial Times, the Gulf states of Alabama, Mississippi, Florida and Louisiana have all presented larger claims for alleged losses. These include economic and property damages, and included tourism and fishing — the region’s lifeblood. The newly detailed claims imply a total bill of more than $90 billion for the energy company if the maximum possible damages are awarded. That’s some serious change.

These claims don’t include any penalties under the U.S. Clean Water Act. If BP is found to have acted with gross negligence, those fines could reach an additional $21 billion dollars.

Still a Mess

BP shares have actually traded up roughly 10% this year. But that’s where the enthusiasm should stop. As an investment, BP still leaves a lot to be desired.

Buying BP over the last two years has been about the turnaround — getting the firm back to being a major energy producer, putting the spill behind it, etc. But it seems that moment is once again being pushed farther into the future.

Any additional claims will severely hurt BP’s finances going forward and could result in more asset sales. Having already sold off some of its prime fields and facilities, anything BP has left to drill is critical to maintain its already strained production numbers.

The idea that future cash flows and dividends could still be hampered by today’s litigation and falling production figures doesn’t make me want to plunk any long-term money into the firm. Especially when its major rivals are doing so well.

BP may someday be a buy. However, that day keeps getting pushed further and further out.

As of this writing, Aaron Levitt is long RDS-A, RDS-B.

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