Investors Are Wondering If BP plc (ADR) (BP) Stock Can Survive Oil In The $30s
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It hasn’t been a good year in the markets for integrated oil and gas companies which, as a group, are down 6.3% year to date through June 27. By comparison, BP plc (ADR) (NYSE:BP) is doing better, off just 2.8% in the period. Storm clouds, though, are gathering for BP stock and its energy peers.
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I happened to catch to catch Continental Resources, Inc. (NYSE:CLR) CEO Harold Hamm on CNBC this morning talking about the price of oil with Squawk Box anchor Becky Quick.
Things were going along nicely until she brought up the subject of falling oil prices, asking Hamm for his thoughts about the per-barrel price possibly dropping into the $30s from $44 where it sits today.
“This price … is not sustainable,” Hamm told Quick. “It needs to be north of $50 for sure to be sustainable in the world.” A drop, Hamm suggested, would cause drillers to ease up on capital spending, which in turn would reduce supply to the point of a shortage, something that hasn’t been seen in the U.S. for some time.
Like OPEC, whose inability to cut production in the past often prevented this type of scenario from playing out, those in the U.S. who can break even in the $30s will just keep pumping away, to heck with the long-term consequences.
What Would $30 Oil Mean for BP?
JPMorgan Chase & Co. (NYSE:JPM) energy analysts like what BP is doing to grow its free cash flow, which is expected to double by the end of the year to $1.8 billion per quarter excluding payments for the 2010 Deepwater Horizon oil spill.
By 2020, the analysts expect the additional production from the start-up of nine key projects over the next two years should add close to $5 billion in annual cash flow. Of course, if oil is in the $30s, the profitability of that additional cash flow becomes much less realistic.
In March, I discussed some of the reasons to own BP stock. One of the big points in BP’s favor in my reasoning was its free cash flow.
“Currently adjusted to exclude a $7.1 billion pre-tax charge related to the Gulf oil spill payments, its free cash flow is $1.8 billion. By 2021, BP predicts that it will be as much as $24 billion based on $55 barrel of oil and a $35 breakeven price per barrel,” I wrote March 29. “In 2017, its breakeven is $60 per barrel, so while it’s got some work to do if it comes anywhere close to these projections, BP stock isn’t going to be trading at a lowly $34.”
Predictions Often Wrong
The JPMorgan energy team suggests adjusted free cash flow by the end of this fiscal year will be $7.2 billion on an annualized basis. Four years from now, BP expects its annual free cash flow will be $24 billion, a 233% increase from where it sits today.
If it happens, BP stock can’t possibly remain in the $30s.
InvestorPlace.com’s Richard Saintvilus reminded investors June 16 that BP forecasts production of 4 million barrels of oil equivalent a day by the end of 2020, 33% more than it current levels.
A million barrels of oil, which is the additional crude from new projects over and above current production, multiplied by 365 days of the year and then multiplied again by $20 equals $7.3 billion in gross profit from the 33% increase.
Bottom Line on BP Stock
I concluded my March article with the statement that I’d sooner put $5,000 into BP stock than I would some of its integrated competitors, including Rex Tillerson’s old company, Exxon Mobil Corporation (NYSE:XOM).
If any energy company can survive a $35-a-barrel oil, it would likely be BP.
Yes, it has an enormous amount of debt — $54.5 billion, as of the end of March — and a couple of decades of additional payments for the oil spill, but other than that, it’s in darn good shape.
With the handsome BP dividend likely to remain in place, the company is willing to pay you 6.8% to wait for things to get better in the oil patch.
I’d say that’s a fair deal.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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