Almost nine years after tearing itself and the Gulf of Mexico apart with the Deepwater Horizon explosion, BP (NYSE:BP) is ready to go again.
The company claimed breathlessly this week it has found “a billion barrels of oil” in a previously explored region 150 miles south of New Orleans, and plans to spend $1.3 billion pumping as much as 38,000 barrels per day from it next year. The field is called Thunder Horse.
The usual suspects insist this makes BP stock a “buy.”
But is this a good place to invest your money? BP stock is dirt cheap, with a market cap of $134 billion on what could be $300 billion of 2018 revenue, while Exxon Mobil (NYSE:XOM) is worth $305 billion with almost the same revenue.
Bargain, right? Not necessarily.
BP’s Condition Today
BP’s books show $55 billion in long-term debt, against just $19 billion for Exxon Mobil. CEO Bob Dudley, who was managing director at the time of the 2010 disaster, is crediting “advanced seismic technology” for the new find, but BHP (NYSE:BHP), the minority partner in what’s called the Atlantis rig, has yet to make a final decision on new investment.
The Atlantis rig has a lot in common with the one that failed. It operates in over 7,000 feet of water and can produce 200,000 barrels of oil and gas per day from a platform the size of two soccer fields. Dudley insists the production will be wildly profitable, even though there are many other producers there and a 14-year old spill nearby is still leaking.
In fact, big oil finds are becoming routine. Exxon itself recently began drilling what it calls a 5 billion barrel field off Guyana. Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B) and Chevron (NYSE:CVX) also announced major finds in the Gulf of Mexico last year.
New plays in West Texas and New Mexico have added a potential 46.3 billion barrels to the Permian field bonanza, which analysts are calling bad news for OPEC and other exporters.
New technology means oil may not be nearly as rare as people have been suggesting. America’s known oil reserves have doubled and the potential global supply could also double.
The Demand Side
At the same time, demand for oil is peaking. Electric cars are replacing traditional gasoline engines faster than previously estimated. The International Energy Agency, whose 2015 analysis was wildly optimistic on the demand side, now insists planes and ships will keep demand rising into the 2040’s, but admits demand from cars should peak in the middle of the 2020’s. Italy’s gasoline demand has been cut in half over the last decade.
Supplies of renewable energy, mainly solar and wind, should total nearly 16 million megawatts this year, and while incentives to install renewables are going away, costs are falling below those of fossil fuels. The cost of utility-scale solar energy is now down to 3.5 cents per watt and continues to go down.
The Bottom Line on BP Stock
BP may be partying like it’s 1999, but the energy world has changed.
New technology is finding more oil and renewable energy prices are continuing to decline. Yet BP faces the same risks and costs in exploiting its new Gulf of Mexico find as it faced 20 years ago.
The BP stock price is down 17% over the last five years, while the average stock in the S&P 500 is up 40%. The price of the shares is little changed from where they were in the wake of the Deepwater Horizon disaster.
The company’s annual dividend of $2.46 per share currently yields 6.45%, and that’s good. But that’s the only reason you should own BP stock. Despite the hype, talk of oil riches is very 20th century.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
