BP plc (ADR) (NYSE:BP) finds itself rallying. After a decade of struggles, oil prices have risen, and BP stock has gone up with it. The BP stock price reached the low $40s for the first time since 2015. The company has also paid most of the costs associated with the 2010 oil spill and has risen substantially following a great earnings report. However, challenges remain that will likely limit the growth of BP stock in the near term.
Many Years of Trouble for BP Stock
The London-based multinational oil and gas company has struggled for about a decade. As one of the few large-cap firms whose stock never recovered the levels achieved before the 2007-09 financial crisis, BP has been searching for a path to growth. Its attempts to recover from the financial crisis failed with the oil spill following the explosion of the Deepwater Horizon drilling rig in April of 2010.
During the oil spill, BP’s reputation suffered tremendous damage which culminated in an agreement to pay a $20-billion fine to the U.S. government, the largest settlement in American history. Additionally, covering state fines and settlements with other stakeholders took the total cost of the spill to $62 billion.
A slump in oil prices in 2014 inflicted further damage to the balance sheet. Unlike with the oil spill, all oil and gas concerns, including Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX) and ConocoPhillips (NYSE:COP) shared in the pain of that slump.
Fortunes Are Slowly Changing
Still, BP has seen signs of good fortune emerging. The company will face reduced liabilities due to the Deepwater Horizon oil spill. The $5.5 billion in related charges for 2017 comes down to $2 billion in 2018 and $1 billion in subsequent years.
Moreover, BP reported stellar numbers in its third-quarter earnings report in October. The stock beat earnings estimates by 9 cents per share and blew away revenue estimates by $10 billion. With higher oil prices, revenue rose by over 27% year-over-year.
Additionally, the impressive growth seen in the last earnings report will go on in the near term. Analysts expect profits to double in 2017 from 2016 levels, rise by 30% in 2018, and then level off in 2019.
BP Needs a Lower Dividend and Higher Energy Prices
Despite the good news, challenges remain. One, as my colleague James Brumley points out, is the dividend, whose cost has exceeded net income since 2014. After increasing the dividend every year, BP has maintained a level of $2.40 per share since 2015. Analysts predict $1.70 per share this year and $2.29 per share for 2018. Any long-term stock growth will involve paying an amount lower than net income in dividends, so dividends remain a limitation.
Moreover, as our own Dana Blankenhorn mentions, BP has more involvement with natural gas than with crude oil. Unfortunately for this company, natural gas prices have not risen in proportion to crude oil prices. While prices remain well above the lows of early 2016, they’ve remained range bound since 2009.
Final Thoughts on BP Stock
Prospects for BP stock have slowly improved. However, challenges remain that will likely limit stock price growth. After facing a financial crisis, an oil spill, and a major oil price slump, news on BP has finally improved. With reduced fine obligations and slowly rising crude prices, revenues and profits have grown substantially in 2017. As a company, BP appears financially stronger than it has in many years.
However, a costly dividend and low growth in natural gas prices have limited the potential of BP stock. A positive change in natural gas and crude prices could increase this potential. However, with a burdensome dividend and natural gas prices that remain low, investors will likely find better opportunities for growth elsewhere.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
