BP braced for tough year

BP will announce full-year figures on Tuesday 3 February, as the final verdict over the Gulf of Mexico disaster still hangs over the company.   

BP sign
Source: Bloomberg

Shares in BP have been plagued by the Gulf of Mexico incident since 2010, but a recent court ruling indicated that the related fine will be smaller than initially thought. A US district court found that the spillage was in the region of 3.2 million barrels, significantly lower than the original estimate of 4.2 million. The judge ruled that BP was not grossly negligent at the time of the accident, but only in the run up the disaster. The maximum fine the oil titan is likely to face is $13.7 billion, over 20% less than originally thought. BP is waiting for the final verdict from a court in New Orleans which we will hear from later this year. Even though the share price was assisted by this news, the market will be cautious until the final decision is revealed.

As I stated in my Chevron article, big oil companies like BP have a natural hedge against erratic moves in the oil market. BP’s share price has been hit by the collapse in the price of oil the past seven months, but the company’s refinery business is picking up the slack from the exploration division. Broadly speaking the fundamentals of BP’s business are still in good shape, but the Russian division is still holding the group back. Third-quarter profits dropped by 21% as the stake in the Moscow-controlled Rosneft dragged the group’s performance lower. The Western-imposed sanctions on Russia have pushed the economy into recession and crippled the rouble. The London-headquartered company owns a 20% stake in Rosneft, and third-quarter net income declined by 86% at the Russian subsidiary.

Yesterday’s fourth-quarter profits from Royal Dutch Shell’s came in well below analysts’ estimates, but plans to cut capital expenditure by $15 billion over the next three years did more damage to the company’s share price. BP is likely to reveal cost-cutting plans also as the company is in a much weaker financial position than Shell – it is worth noting that Shell is more than two-and-a-half times bigger than BP in terms of market capitalisation.

BP will report full-year numbers on Tuesday 3 February, and the consensus is for revenue of $348 billion and adjusted net profit of $12.17 billion. These estimations equate to an 8% decline in revenue and a 9.7% drop in adjusted net profit. The company will also reveal its fourth-quarter figures on the same date, where traders are anticipating revenue of $80.69 billion and adjusted net profit of $1.91 billion. The third-quarter numbers were met with a mixed reaction, with a revenue of $93.9 billion and adjusted net profit of $3.03 billion, while the market was expecting $94 billion and $2.93 billion respectively.

Equity analysts are bullish on BP, and out of the 37 recommendations, 13 are buys, 20 are holds and four are sells. The average target price is 452p, which is 4% above the current price. Investment banks are also bullish on Shell, and out of the 33 ratings, 19 are buys, 12 are holds and only two are sells. The average target price is £24.14, which is 11% above the current price.

The share price has been in a downward trend since June, but there are some signs that the trend is changing. The previous resistance at the 50-day moving average is now acting as support at 414p, and this makes the 200-day moving average of 462p the target. A close above this metric would be required to convince traders the stock is shaking off its downward trend, and then £5 will be brought into play. A drop below 414p will bring 380p into sight.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.