Shares of energy major BP (NYSE:BP) haven't performed well in the past several months. The uncertainty surrounding its 2010 Gulf of Mexico oil spill costs is one of the reasons for the decline in BP's stock, but not the only one. Recent developments in the oil market and the company's performance in the last quarter of 2013 have also taken their toll. Here are four factors contributing to weakness in shares of BP. Several of these factors could continue to pressure shares in the coming months.
The spread between Brent and West Texas Intermediate crude oil dropped to single-digit territory in recent weeks. The average spread was roughly $9.40 per barrel during the first quarter of 2014, the lowest level since the third quarter of 2013. In comparison, the spread was $18 per barrel in the first quarter of 2013. The slimming spread dragged down the company's profit margin from its refinery operations during the previous quarter. That restricted margin could persist if the spread remains this low.
BP doesn't see growth in 2014, with reported production not expected to rise this year, mainly because of the expiration of its Abu Dhabi onshore concession. Nonetheless, the company expects cash flow from operations to rise by more than 40% to $30.5 billion. This estimate, however, could be overoptimistic considering the narrower spread between Brent and WTI and the drop in the price of oil in the first quarter of 2014. Moreover, the weather conditions were particularly harsh across much of the U.S. and could have reduced BP's production in natural gas and oil fields during the first quarter. Finally, the company expects to divest $10 billion worth of assets by the end of 2015. This would reduce the company's operations in the coming years, particularly since these funds would be allocated toward dividend payments, share buybacks, and perhaps even covering additional oil spill-related costs.
BP, much like other leading oil producers, didn't perform well in the fourth quarter, with revenue declining by 3% quarter over quarter. Moreover, its gross profitability dropped by nearly 4 percentage points. In comparison, ExxonMobil (NYSE:XOM) recorded a 2.2% fall in revenue in the last quarter of 2013. Nonetheless, the oil and natural gas markets heated up in the first quarter of 2014; this is likely to improve revenues and profit margins for BP and ExxonMobil.
Finally, there is the Deepwater Horizon oil spill lawsuit, in which the Fifth Circuit Court of Appeals on March 3 upheld the District Court's ruling from Dec. 24, 2013, in which the court rejected BP's claim to prevent business economic loss, or BEL, claimants whose alleged injuries were not directly linked to the incident. BP didn't set aside a provision for the BEL claims, so the company will eventually need to allocate additional funds for these claims.
This is likely to keep the uncertainty around the company's business in place. But for now the company continues to drag out these court filings; it could take quite some time before BP makes any payments to the plaintiffs. ExxonMobil also made many appeals in its 1989 Valdez oil spill case, which also took years before all claims were settled. On a positive note, BP recently announced it had finished the cleanup of the shoreline; this is another money hole the company could take off its back.
The oil spill settlement will keep hovering over BP's head. But the company also faced additional issues dragging down its stock in recent months: the lack of growth in production, the potential decline in profit margin in its refinery operations, and disappointing fourth-quarter earnings. Looking forward, these factors could keep holding back the company's stock.
Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.