British oil and gas major BP (BP +1.76%) recently reported its fourth-quarter and full-year 2012 financial results. Like other major integrated oil companies such as ExxonMobil (XOM 0.77%) and Chevron (CVX +0.28%), BP's profit for the fourth quarter was negatively affected by weakness in refining. BP's bottom line also suffered due to divestments, which cut its production. Meanwhile, the company still faces billions of dollars in charges related to the Gulf of Mexico oil spill. Despite this scenario, I think BP looks like the most attractive investment option among the big oil companies.
BP's Q4 results
BP reported fourth-quarter earnings of $2.8 billion, down from $3.9 billion reported for the same period in the previous year. The sharp decline in profit was due to weaker refining margins and the company's major divestment program, which had a negative impact on production.
Weaker refining margins and lower production also hurt the bottom line of other major integrated oil and gas companies. Chevron reported a 32% drop in fourth-quarter earnings late last month, while Exxon's earnings for the fourth quarter fell from $9.95 billion to $8.35 billion.
What makes BP the better investment option?
While BP's results for the fourth quarter and 2013 were not very different from those of other oil majors, there were some encouraging trends that make the company more attractive than its rivals.
Excluding acquisitions and divestments, BP's reserve replacement ratio on a combined basis of subsidiaries and equity-accounted entities was 129% for 2013. This compares to 77% reported in 2012. A reserve replacement ratio of above 100% augurs well for future production. Both Chevron and Exxon will provide their reserve replacement ratio for 2013 later this month. However, Chevron noted in its fourth-quarter results press release that its three-year average reserve replacement ratio is 123%. Exxon's 2012 reserve replacement ratio was 115%.
BP's cash flow from operating activities of $21.1 billion in 2013 was lower than the company's organic capital expenditure of $24.6 billion. The trend has been similar at other major oil companies. However, BP expects its organic capital expenditure to remain between $24 billion and $25 billion in 2014 and between $24 billion and $27 billion at the end of the decade. If the company can achieve its target of generating $30 billion to $31 billion in operating cash flow for 2014, it would be in much stronger position than its rivals to maintain or raise its shareholder distribution. BP has already indicated that it is on track to achieve its operating cash flow target for the year.
BP has been divesting less profitable oil fields and is focusing more on profit margins than volume. Bob Dudley, CEO of BP, said back in October that in 2011, the company set a clear target for operating cash flow in 2014 and he is confident in its delivery.
In addition, BP has also shown strong commitment to shareholder distributions. The company raised its quarterly dividend by 5.6% in October last year. In addition, the company said that its Board plans to review the level of dividend with the first and third quarter results each year. Dudley said back then that the strong operational progress BP is now seeing across the group, combined with the company's focus on disciplined investment, underpins his confidence in growing long-term sustainable free cash flow and being able to increase shareholder distribution. BP had also announced in October that it will divest an additional $10 billion of assets by the end of 2015. The company plans to use the post-tax proceeds mainly for additional distributions.
Another reason BP looks more attractive than its rivals is net debt. While Exxon and Chevron saw their net debt increase sharply in 2013, BP actually saw its own net debt fall from $27.5 billion at the end of 2012 to $25.2 billion at the end of 2013.
While all these factors make BP attractive, the big concern for investors remains the 2010 Gulf of Mexico oil spill issue. At the end of 2013, the company's cumulative pre-tax charge for the oil spill was $42.7 billion. The company still faces billions of dollars in fines. This creates a great deal of uncertainty, and is the main reason why BP trades at a significant discount to its rivals.
Despite the uncertainty, I think BP looks more attractive than its rivals, given its focus on increasing shareholder distribution.
