The Motley Fool Previous Page

The Bullish Case for BP

Tyler Crowe
October 27, 2013

Ever since the Macondo incident in 2010, many have considered BP (NYSE: BP) a toxic asset. Original estimates for the massive Gulf of Mexico oil spill totaled more than $140 billion in costs for BP, and there were threats that the company could crack in the face of these bills. There are still many questions remaining regarding BP, but there are also some reasons investors may want to reconsider this oil giant. Let's take a look at three reasons why investors should be bullish on BP. 

1) Macondo won't kill the company
So far, BP has spent approximately $42 billion for everything related to the spill, and it is on the hook for another potential $55 billion for charges from both the Clean Water Act and local and state government claims. It is highly unlikely that court decisions will result in the maximum penalties in both of these cases, so it's safe to assume that the final penalties will be less than $55 billion. Either way, a total of $97 billion is significantly lower than the $140 billion hit that scared investors in the midst of the spill. 

The fear that many investors may have today is that the $20 billion trust fund set up by BP to cover most of the legal claims from the spill wouldn't cover all the costs, and that the company would need to take earnings hits for the remainder of the costs. One assurance to calming this fear is that BP has more than $28 billion in cash and short-term investments sitting on its balance sheet, with almost $10 billion of that designated specifically to handle future claims and litigation. Also, with the company generating nearly $22 billion in cash over the past 12 months from both asset sales and operations, BP should be able to stash enough cash to cover these issues without any major unexpected hits to the income statement.

2) Earnings power viable despite major asset selloff
One way BP has covered costs for Macondo has been by selling off more than $38 billion of its assets. The most recent of these deals was to sell its Texas City refinery and associated assets to Marathon Petroleum (NYSE: MPC) for $2.5 billion. While there may be concerns that the company's ability to generate returns will be severely hampered by these moves. BP has so far avoided drastically impacting its primary income generation engine: the upstream side of the business.

Some may critique BP for not getting top dollar for its sales of the Texas City refinery to Marathon or the Carson refinery to Tesoro (NYSE: TSO) earlier this year, but what may be overlooked is the ability to generate $5 billion from these assets in a business segment that doesn't add much to the bottom line of the company. Even with the Texas City and Carson refineries, the downstream segment only represented 8% of the company's 2012 earnings even during one of the best years for U.S. refiners

In fact, BP may actually be ahead of the curve in comparison to the rest of its integrated major peers. Big oil has struggled recently in the downstream side of operatio