Back on March 10, BP plc (ADR) (NYSE:BP) was pegged as a potential buyout target of Exxon Mobil Corporation (NYSE:XOM). The market responded, of course, sending BP stock slightly higher. Given the nature of the news though, one would have expected a more bullish reaction. Perhaps the doubters knew what they were doing; Here we are more than a month later and still no buyout offer.
What gives? The simple answer to that simple question is a question in itself: Why would Exxon Mobil want to spend a fortune to own a cash-burning headache?
Current and would-be owners of BP stock may want to rethink any bullishness they may be fostering for the oil giant. Not only is the BP dividend in jeopardy, the U.K.-based company rates as one of the most-troubled energy stocks among all the large caps.
Cost Cuts? What Cost Cuts?
The recent corporate rhetoric is compelling. In early February, the company upped its outlook on the heels of planned cost cuts. BP thinks that by 2021, its break-even point could be as low as $35 per barrel. That cost structure would keep BP stock profitable even under the most dire conceivable circumstances. CFO Brian Gilvary explained, “We expect this combination of continued cost discipline with the growing cash flow from our core businesses will steadily drive down the cash balance point of the business.”
There’s just one problem with Gilvary’s thinking: The company’s cash flow isn’t actually getting any better. And, as far as cost discipline goes, it’s difficult to see any of it.
The graph below tells the tale. Spending — including CapEx — is still going strong. Losses are still the norm.
In the company’s defense, some expenses rise and fall in step with oil prices. And, even as it’s selling off assets, BP is investing in others, looking to find an optimal, affordable mix of properties. Earlier this month it shed it Forties North Sea pipeline to Ineos and in March it bought the renewable natural gas business from Clean Energy Fuels Corp (NASDAQ:CLNE).
That’s just a small sampling of the wheeling-and-dealing BP stock holders — along with owners of other energy stocks — have seen since 2014, when the implosion of oil prices sent the industry scurrying for safety. Brewin Dolphin analyst Iain Armstrong commented this week “You’d hope by now the cost and spending cuts start showing up in the accounts.”
So far though, they aren’t showing. Maybe that’s because BP hasn’t actually put in place the cost discipline it’s touted. Maybe it can’t. It certainly can’t at its current investment pace. While the company lowered its breakeven point for 2021, for this year, that figure was bumped up to $60 per barrel to reflect recent expenditures.
Lots of Debt
It’s not just an unusually high willingness to spend that’s keeping a potential suitor at bay, though. Even disregarding the potential antitrust wall a merger effort would most certainly hit, any outfit that puts BP in its acquisition sights would have to be willing to take on a mountain of debt.
In contrast to the defensive postures they say they’ve been taking on, most of the major oil names have actually taken on more debt since 2014. And why not? Money’s been dirt cheap. In that regard BP isn’t unusual… it’s added debt in recent quarters as well.
There is a difference, though. That is, BP was already debt-laden. For perspective, BP currently sports a long-term debt/equity ratio of 54%, and an overall debt/equity ratio of 61%. That’s one of the highest in the industry, and is THE highest relative level of debt among large energy stocks that aren’t in special, debt-driven situations.
Throw in the fact that the liability from 2010’s oil spill disaster in the Gulf of Mexico remains fresh in people’s minds — seven years after it happened — thanks to a much smaller but just as embarrassing recent spill in Alaska, and the company just looks like a bad bet to a potential buyer.
Bottom Line for BP Stock
OK, so BP stock may not be a prime acquisition target, but doesn’t the BP dividend yield of nearly 7% makes shares worth owning all the same? Maybe, or maybe not.
Take a closer look at the income statement. BP has dished out more in dividends than it’s earned for more than a year now. That’s true of most energy stocks of late, but unlike those other names, BP isn’t even close. Citi analyst Alastair Syme doesn’t see BP lowering its dividend this year, even though it arguably should. That didn’t prevent Syme from downgrading BP stock to Neutral last week, with the analyst voicing concern about the company’s still-high costs.
BP may well be poised for a breakeven at $35 per barrel by 2021, but it could be a long, long four-year stretch for BP stock holders between now and then. And, it’s certainly not a buyout target in the meantime.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.