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Zacks Rank #5 (Strong Sell) stock British Petroleum ((BP - Free Report) ) is a global energy corporation focusing on oil and gas activities such as exploration, production, refining and distribution. BP, among the leading players in the oil industry worldwide, engages in all aspects of the petroleum supply chain –from extracting oil to transforming it into fuel and chemicals before selling it through its retail outlets. Moreover, BP is also venturing into other energy fields, like wind and solar power as part of its overarching strategy to adopt an environmentally sustainable energy approach.
BP Oil Spill Expenses Weigh
The BP oil spill of 2010, also known as the “Deepwater Horizon” oil spill, was one of the largest environmental disasters of all-time. Caused by an oil explosion on a deepwater oil platform, the BP oil spill resulted in more than 200 million gallons of oil discharged into the Gulf of Mexico. The accident not only had a disastrous effect on the eleven people who perished and the environment, but it also had a long-lasting impact on BP. Though BP has finally resolved litigation surrounding the incident, the incident continues to plague the company in three significant ways:
1. Reputation: Because of the scope of the disaster, BP’s reputation will always be tarnished.
2. Expenses: BP is still paying damages from the incident, with a hefty $1.2 billion pre-tax bill in 2024.
3. Divestitures: The expenses related to the incident mean that BP has a higher debt-to-capitalization ratio than its peers. The company has also been forced to sell assets, potentially limiting its future cash generation.
BP’s long-term debt capital of 38.22% is far higher than the oil industry’s 21.02%.
Image Source: Zacks Investment Research
BP to Sell Wind Business
BP is selling its ~$2 billion renewable wind business as the company continues offloading underperforming assets to pay expenses. However, the company will be negotiating the sale of the business from a position of weakness. Last year, BP wrote down the business by more than $1 billion, and the company’s former renewables head warned, “Ultimately, offshore wind in the US is fundamentally broken.” Meanwhile, the landmark nuclear deal to reopen “Three Mile Island” between Microsoft ((MSFT - Free Report) ) and Constellation Energy ((CEG - Free Report) ) suggests that the market is moving more toward nuclear energy as a reliable, more efficient, and renewable source of energy.
Geopolitical Events are “Sell the News” Events for Oil
While geopolitical impacts can have short-term impacts on markets, history suggests that those impacts are often short-lived. For example, the War in Ukraine started in February 2022. Though most investors would expect a war in an oil-producing country like Russia to drive energy prices higher, since that time, most oil stocks, the Energy Select SPDR ETF ((XLE - Free Report) ), and the US Oil Fund ETF ((USO - Free Report) ), have actually been lower.Despite tensions rising between Iran and Israel recently, I expect the same outcome this time around.
BP Underperformance
BP has fallen short of Wall Street expectations in four of the past five quarters. From a price perspective, BP is down for the year while the S&P 500 Index is up more than 20% - evidence of relative weakness.
Image Source: Zacks Investment Research
Bottom Line
Oil and oil stocks like BP have underperformed despite rising geopolitical tensions. Meanwhile, BP’s high relative debt levels and poor price action make the stock an avoid in the oil patch.
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Bear of the Day: BP (BP)
BP Company Overview
Zacks Rank #5 (Strong Sell) stock British Petroleum ((BP - Free Report) ) is a global energy corporation focusing on oil and gas activities such as exploration, production, refining and distribution. BP, among the leading players in the oil industry worldwide, engages in all aspects of the petroleum supply chain –from extracting oil to transforming it into fuel and chemicals before selling it through its retail outlets. Moreover, BP is also venturing into other energy fields, like wind and solar power as part of its overarching strategy to adopt an environmentally sustainable energy approach.
BP Oil Spill Expenses Weigh
The BP oil spill of 2010, also known as the “Deepwater Horizon” oil spill, was one of the largest environmental disasters of all-time. Caused by an oil explosion on a deepwater oil platform, the BP oil spill resulted in more than 200 million gallons of oil discharged into the Gulf of Mexico. The accident not only had a disastrous effect on the eleven people who perished and the environment, but it also had a long-lasting impact on BP. Though BP has finally resolved litigation surrounding the incident, the incident continues to plague the company in three significant ways:
1. Reputation: Because of the scope of the disaster, BP’s reputation will always be tarnished.
2. Expenses: BP is still paying damages from the incident, with a hefty $1.2 billion pre-tax bill in 2024.
3. Divestitures: The expenses related to the incident mean that BP has a higher debt-to-capitalization ratio than its peers. The company has also been forced to sell assets, potentially limiting its future cash generation.
BP’s long-term debt capital of 38.22% is far higher than the oil industry’s 21.02%.
Image Source: Zacks Investment Research
BP to Sell Wind Business
BP is selling its ~$2 billion renewable wind business as the company continues offloading underperforming assets to pay expenses. However, the company will be negotiating the sale of the business from a position of weakness. Last year, BP wrote down the business by more than $1 billion, and the company’s former renewables head warned, “Ultimately, offshore wind in the US is fundamentally broken.” Meanwhile, the landmark nuclear deal to reopen “Three Mile Island” between Microsoft ((MSFT - Free Report) ) and Constellation Energy ((CEG - Free Report) ) suggests that the market is moving more toward nuclear energy as a reliable, more efficient, and renewable source of energy.
Geopolitical Events are “Sell the News” Events for Oil
While geopolitical impacts can have short-term impacts on markets, history suggests that those impacts are often short-lived. For example, the War in Ukraine started in February 2022. Though most investors would expect a war in an oil-producing country like Russia to drive energy prices higher, since that time, most oil stocks, the Energy Select SPDR ETF ((XLE - Free Report) ), and the US Oil Fund ETF ((USO - Free Report) ), have actually been lower.Despite tensions rising between Iran and Israel recently, I expect the same outcome this time around.
BP Underperformance
BP has fallen short of Wall Street expectations in four of the past five quarters. From a price perspective, BP is down for the year while the S&P 500 Index is up more than 20% - evidence of relative weakness.
Image Source: Zacks Investment Research
Bottom Line
Oil and oil stocks like BP have underperformed despite rising geopolitical tensions. Meanwhile, BP’s high relative debt levels and poor price action make the stock an avoid in the oil patch.