This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

BP: Beyond pathetic?
This week on Wall Street, it's a case of bad news, good news, and a little more bad news for investors in oil major BP (NYSE: BP  ) . The bad news is, of course, the announcement yesterday that oil analysts at Jefferies are downgrading the shares (to neutral).

On the bright side, investors don't seem to be paying attention, actually bidding BP up yesterday despite the downgrade. But now for the really bad news: Jefferies is right. BP is a basket case, and it deserved the downgrade -- and investors ignore the analyst's warning at their peril.

The details
So what is it, exactly, that Jefferies doesn't like about BP? Well, for starters, there's the company's $1.4 billion loss. Earlier this week, BP confirmed that declining oil prices, and weak production levels, combined with charges taken to write down the value of BP refineries and shale assets to cause the loss. Partly, this isn't BP's fault of course -- the company has, after all, very little control over the direction that oil prices go, this being more a function of weak demand in an anemic economy.

On the other hand, weak production levels are something BP can do something about. Problem is, it isn't actually doing much to fix them. Check out the levels of capital spending at the big global oil firms, and you quickly notice a trend of generally higher and higher levels of investment being made by firms such as ExxonMobil (NYSE: XOM  ) , ConocoPhillips (NYSE: COP  ) , and Chevron (NYSE: CVX  ) , but declining capital spending at BP. On the one hand, this has the effect of boosting cash production at the company, but one logical consequence of such capital underinvestment is lower levels of production as time goes by -- which is precisely what BP is now reporting.

Hindering profitability even further, Jefferies notes that BP has higher operating costs than you find elsewhere in the industry. Operating profit margins at Chevron, for example, are more than twice the 7.6% found at BP. Meanwhile, Exxon, Conoco -- even French oil major Total (NYSE: TOT  ) -- they all boast robust double-digit operating margins, while BP continues plodding along at a sub-8% level. Add in the potential for "additional liabilities" from Deepwater Horizon, and BP's profits may be depressed for quite some time.

Foolish takeaway
Given all this, it's little wonder that Jefferies is so down on the stock. Fellow Fool and energy investor David Lee Smith says he'd rather "sit on [his] wallet" rather than invest in the stock, either -- even at the seemingly attractive price of 7.2 times forward earnings.

I have to say that, after reviewing the numbers, I'm not terribly optimistic about BP myself. Fortunately, our research team here at the Fool thinks there's really only one energy stock you'll ever need -- and BP isn't it. To learn which stock our analysts are betting on to beat BP's returns over the next several years, just click here.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 314 out of more than 180,000 members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of ExxonMobil.  Motley Fool newsletter services have recommended buying shares of Total and Chevron.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 02, 2012, at 2:22 PM, Duke5343 wrote:

    BP is set to expand near double in 4 years & not the mess it is made out to be

  • Report this Comment On August 02, 2012, at 5:16 PM, Daryl98229 wrote:

    Part of BP's weak production levels for 2012 are from the Cherry point outage from Feb to May after a fire. There were no injuries and a lot of maintenance was completed.

    Small piece of the BP pie though..

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