Page 17 - Fuels & Lubes International 2014 - Q2

17
FUELS & LUBES INTERNATIONAL Volume 20 Issue 2
In addition, a recent ruling from the 9th
U.S. Circuit Court of Appeals just breathed
new life into a shareholder lawsuit against BP
for statements the company made after a 2006
oil spill in Alaska. This presents BP with a huge
challenge in meeting those legal costs while
maintaining the cash flow that an oil company
must do to please the analyst community
in a low-growth era.
Further increasing the demands on the
capital generated from operations is that BP
holds a unique place in that its dividend stream
finances a significant portion of the pension
income for the United Kingdom. It is also
one of the biggest members of the FTSE, the
European stock index of major firms. Although
keeping its share price high is crucial for BP,
the dividend component is critical. According
to research from BP, the dividend payments
from the company “...accounts for 8% of UK
pension fund income.” As one of the largest
publicly traded corporations in Great Britain
with such a key role in the social fabric of
the country, BP has tremendous corporate
responsibilities in how it upholds its stock
price and maintains its dividend.
That certainly accounts for the recent sale
of BP’s aviation turbine oil business.
BP has sold USD40 billion in assets to meet
the costs of litigation, bolster its balance sheet,
fund stock buybacks to raise its share price and
be able to pay a dividend in the 4.6% range.
Another USD10 billion in divestitures is planned
by the end of 2015. This peddling of assets has
taken BP from being the top oil producer in the
world before the Gulf oil spill to being the fifth
largest. It tried to sell its U.S. wind power unit
last year but could not find a buyer willing to pay
enough to complete the transaction. Based on
margins in the industry, the sale of the aviation
turbine oil unit to Eastman Chemical should
bring in about USD1.6 billion.
The sale does not mean that BP is pulling
back from the lubricants sector, according
to Iain Conn, BP’s chief executive for
refining and marketing. Conn said that
“The divestment will enable BP’s lubricants
business to focus on investments in other
industry sectors. Our intent is to grow the
lubricants business globally.”
What it does mean is that BP is selling high
margin businesses, such as aviation turbine oil,
to please Wall Street.
That may seem odd that a company should
get rid of its best assets and reduce capital
spending to make investors happy, but Wall
Street hates uncertainty. And there is nothing
worse than being the target of lawsuits and
punitive Federal Government measures in
the United States, especially in the plaintiff-
friendly sanctuary of Louisiana. BP, with a
market capitalization of less than USD153
billion has been hit with more than USD40
billion in legal expenses, with more to come.
As a result, pretty much everything BP is
doing at present is to placate the investment
community. This is needed as the chart below
shows how BP is trading at a substantial
discount to ExxonMobil (XOM), Chevron
(CVX) and ConocoPhillips (COP):
To bring its stock price in line with the oth-
ers, BP must divest of marketable components,
build up capital reserves and move to solidify
its base of operations. The assets sales and other
actions are working in that BP’s stock price is
rising, up more than 20% in the last six months.
Paradoxically, this restructuring puts
BP into position to return to the lubricants
business in an even stronger role when it
has reestablished itself in the investment
community. As the chart reveals, the company
is not as highly regarded by Wall Street as its
peers in the industry. To try to ameliorate
that situation, BP is selling its best assets
from a position of weakness to settle claims
and increase its share value. When its legal
problems are resolved and the stock price
higher, it will have a much more robust base
of operations with much cheaper capital for
expanding its global lubricants business.
BP XOM CVX COP
Trailing PE 6.4 12.3 9.2 9.8
Price to Book 1.2 2.4 1.5 1.6
Price to Sales 0.4 0.9 0.9 1.3
Price to Free Cash Flow 7.10 8.80 5.90 5.10
Dividend Yield(%) 4.60% 2.70% 3.50% 4.20%