Typically, oil prices are based on the mood in which an analyst might wake up, yet some speculators are calling the recent drop in oil prices a result of the Greek default on its debt.
Others could just as easily argue it's simply that BP (NYSE:BP) has decided to do more than skim the top of its cash reserves to pay off damages and lawsuits relating to the Gulf Coast. Should we finally stock up on BP shares?
A full transcript follows the video.
Sean O'Reilly: Industry Focus is filmed in front of a live studio audience.
Greetings, Fools! I am Sean O'Reilly, joining you here from Fool headquarters in Alexandria, Va. To my left is the incomparable, the amazing, the stunningly cool, the ridiculously handsome, Tyler Crowe.
Tyler Crowe: You know, when you say this much to people it gets their hopes up that I'm going to say something really smart and insightful. Then what if I don't?
O'Reilly: Yeah. They think I'm sitting here with Brad Pitt, or George Clooney, or somebody awesome, and it's just you.
Crowe: I could be a hunchback. It's just me.
O'Reilly: Yeah. It's just Tyler Crowe, everybody. It's kind of a fib, because the only audience we really have is the tech guy, Austin. Hi, Austin. Can you wave?
Crowe: Our one -- live studio audience of one. It's great.
Crowe: To go along with our dozens of listeners.
O'Reilly: Do you have one of those fake studio clap/laugh things that sitcoms do?
Austin Morgan: I wish I did, but I don't.
O'Reilly: Man. Oh, well. We'll try to get that for you, folks. So today is the energy edition of Industry Focus. Before we get to the big news of the day -- which we'll get to in a second -- we are talking about how everybody on the Internet is talking about how Greece is responsible for the 4% pullback in oil prices.
Crowe: Something like that. Oil price moved. Eh.
O'Reilly: This morning we were talking about it, and there are tons of articles like "Oil Drops on Greece Fears."
O'Reilly: The euro isn't even falling. I actually checked that for the heck of it.
Crowe: OK. For everyone who's listening, here is the concept that people run on the idea that a Greek default could bring on an epic collapse in oil demand. Here's the theory they're working on: Basically they're saying as Greece collapses, or pulls out of the euro -- or whatever the heck is happening over there -- I can't keep track of it anymore. It's been going on for how many years?
O'Reilly: They're having a referendum deciding whether to stay in the euro or not.
Crowe: Four or five years?
O'Reilly: It more or less started right after the financial crisis.
Crowe: So this is the zombie that will not die. It just keeps on coming back and biting. My theory is that there is a collusion between the media and Greece that says, "You just keep talking about us and we'll have some financial crisis, just so we can have some media attention all the time."
O'Reilly: This is what happens when you have a 24-hour news cycle.
Crowe: Exactly. Basically, it's saying if Greece is to pull out or default on its loans -- which it just did -- the value of the U.S. dollar compared to the euro, the dollar will strengthen, making it more expensive for oil in Europe, and oil demand in Europe is going to decline. That is a really, really loose definition of what actually could happen when it comes to prices. A couple things we have to keep in context here: The European Union and all of Europe is a very important factor when it comes to the global financial market.
O'Reilly: The European Union as an entire economy is very comparable to the United States.
Crowe: It's very strong.
Crowe: With the exception of oil consumption.
Crowe: If you look at Europe in general, all the member states of the European Union consume less than 10% of the world's oil demand. Greece itself -- let's say a pure apocalypse comes over Greece and gasoline and all oil is never used again -- we drop total daily consumption by about 250,000 barrels a day. Less than 1% of world consumption.
O'Reilly: Doesn't EOG Resources (NYSE:EOG) pump out more than that?
Crowe: Oh, yeah. There's a bunch of mid-majors in the United States that pump out more than that on a daily basis. The United States today consumes about 17 million barrels per day, give or take a bit less or more. Don't quote me on that number. All of the European Union nations, a little bit less than that.
It's a decent amount, but if you go across the entire world and compare that one thing to everything else, it's not that big of a deal. To see oil prices collapse -- 4% is not a huge thing. To see them drop as significantly as they did and for the media to say that so much of it is related to Greece ...
O'Reilly: And fears.
Crowe: It seems sloppy.
O'Reilly: What do you think are the real reasons?
Crowe: Somebody got off the wrong side of the bed in the morning. Just like when it comes to the stock market, oil price is dictated by what people think. It's an emotional and psychological thing. If you want to look at some tangible things that could be tied to it -- this is even speculative on its own -- it's the fact that nuclear talks with Iran are getting better, and the potential of oil and gas production out of Iran could be very strong under the premise that they would have to finish these nuclear talks and actually come out with a favorable result.
There's your first "if." The second "if" is that they raise enough capital from outside parties to help them develop those things. So you've got two "ifs" there. That's speculative. The only thing that's probably tangible is that there is a bit of buildup of crude inventories in the United States. I don't know. It just seemed human psychology ruled the day more than anything else when it comes to oil prices over the past couple of days.
O'Reilly: Excellent. Before we move on to our big story of the day I did want to make a note about our sponsors. If our listeners are finding this discussion informative, they like IF, and you want to know what energy companies The Motley Fool recommends in its award-winning Stock Advisor newsletter; we have a very special offer for all IF listeners. It's $129 for a full two-year subscription to Stock Advisor. You'll get two new stock picks every month from our team of analysts.
If you want to take advantage of this, head to focus.fool.com. That's focus.fool.com. Without further ado -- do you have a drumroll, Austin? No? Thank you, Tyler. Drumroll ... BP finally made a blanket settlement for the Deepwater Horizon oil spill, which was four or five years ago.
Crowe: Five years ago.
O'Reilly: Yeah. I remember when it happened. South Park made a joke about the CEO.
Crowe: I was working for a -- I was in school -- but I had ties to the government agencies that were working on the oil spill.
O'Reilly: It was you that caused this!
Crowe: It was all my fault. I'm sorry. I was down in New Orleans at the time, and I actually spent some time with people working on this.
O'Reilly: You got them drunk, and that's why this happened. I'm kidding.
Crowe: It's totally my fault.
O'Reilly: You were telling me, it was basically a blanket settlement. They're actually done for the low price of $18.7 billion.
Crowe: Really, chump change, right?
O'Reilly: This actually speaks to how much Wall Street loves clarity, because the stock is up 4%.
Crowe: Yeah. It's up 4% or 5%. This morning as we were coming in, Sean and I were looking at each other and said, "What are we going to talk about today? We can talk about oil prices a little bit, but nobody cares anymore." Then it was almost as if...
O'Reilly: Like manna from heaven.
Crowe: Like manna from heaven, we come down, we look at our phones and it says "BP Settles Gulf States for $18.7 Billion." We were like, "Yes! We know exactly what we're going to do now."
Crowe: Just a little bit of background on what this all meant. BP has been in negotiations with -- or fighting legally with -- the federal government under what's known as the Clean Water Act. It was a settlement about polluting the water. They were going to have to pay damages based on how much they spilled. That could have been as much as $13 billion. Most people agreed that it wasn't going to be that much based on an earlier ruling that said BP had not been negligent in the actual cleanup efforts.
They may have been negligent during the lead-up to it, but the actual cleanup was robust and they had done a commendable job. Thirteen billion -- not as much as they expected. However, there were several other lawsuits that haven't even come to court yet that were really starting to loom on the horizon, and everybody started realizing, "This could drag out as long as Exxon Valdez." If anyone remembers, the last court settlement related to the Exxon Valdez oil spill was in 2011.
O'Reilly: Good Lord!
Crowe: That spill happened in 1989. We're talking about 22 years of litigation related to the Exxon Valdez oil spill. That one, while it was environmentally damaging, it was considerably smaller than this one. The payments we were looking at for BP were considerably higher. You combine the Clean Water Act federal case, the Oil Pollution Act -- which was going to be a case that the states were going to take to it -- there were natural-resource damage claims that the states were going to take; we were talking about in excess of $30 to $40 billion in potential payments over that 20-year time horizon.
O'Reilly: Wow. Anytime a company blows up, I look at it. I'm like, "Everybody's afraid. I need to look at this." I remember thinking, "This could be awesome." They were talking 30 to 50 billion dollars for this sucker.
Crowe: Yeah. It was interesting. Just a couple days ago there was a Bloomberg report saying it could be as much -- if you include all of the cleanup efforts and all that other stuff -- they were saying that it could have reached as much as $68 billion. Now, with this $18.7 billion settlement, more than anything, it's a good amount of money. It is. The most important thing this gives is some clarity to the situation, from an investor's standpoint, instead of looking at it and going, "We could get dragged through the mud for 20 more years, through all these payments, and then there's appeals and it could take a really long time."
Now we know -- $18.7 billion. I believe on the release the company said that they were going to pay these out over the next 10 or 15 years. There are pro-rated payments over set intervals of times, so they don't have to throw $18.7 billion at it all at once. It gives a sense of "this is what we have to deal with." I'm sure management looked at it the same way and said, "We can settle this right now, know exactly what we're going to get, and tell our investors this is what we have to do, and this is how we're going to manage it."
With all that opaqueness when it came to the court battles, we've wiped that away, and as you saw with the stock today, up 5%. That's almost unheard of when you talk about integrated majors in a single day of trading. This was only in a couple hours.
O'Reilly: It's up 5%, and the market cap's now $125 billion. So it's up $5 billion. When you were talking about it, I was wondering, if you're BP, how much the Exxon Valdez oil spill and how long that dragged out -- 22 years -- how much that was in their minds. Had that not happened, would BP have been so quick to just wrap the sucker up? There are multiple people at [ExxonMobil (NYSE:XOM)] whose job was to deal with all the crap from Exxon Valdez.
Crowe: Right. Looking at it from another perspective as well, the maximum payment that ExxonMobil paid for the Exxon Valdez was $500 million.
Crowe: Now, granted there were a lot of oil pollution laws ...
O'Reilly: Because that was the first big ...
Crowe: That was one of them. There's a lot that's happened in our history that we don't necessarily talk about. Back in the 1920s, 1930s, but that's ancient history. After the 1989 oil spill, there were a lot of new laws that came into play in relation to oil spills, natural resource damage, which helped to amass the massive amount of potential payments that BP could see in relation to these things. I've got to imagine that somebody at BP was looking at this going, "Oh my God. Could we get dragged through the mud for 20 years on this and every quarter have to give an update on what's going on?"
O'Reilly: Because every analyst report for the last five years has at least mentioned this in a couple sentences.
Crowe: Yeah. Every single quarterly earnings report, they have to give an update on what's going on with the legal action and how much they've spent on it so far. "We're wiping our hands here. We can move on."
O'Reilly: Boom. Wow. What are your thoughts on BP as an investment? We haven't really talked about them.
Crowe: Well, if I'm an investor today and I'm looking at it, right now it has a dividend yield of just under 6%. That's very large when compared to most integrated majors. The clarity that this settlement brings -- one small caveat -- we're not completely certain the states are going to accept this settlement. This is BP saying, "We're going to settle." I think there are a couple small issues where if someone says, "No, we're going to take you to court," there's always that option. I'd have to go back and double-check this. Please don't listen to this radio show and take this as the gospel; I'm pretty sure this has been settled.
If I can go back and relook at the stock at this time, some things that have really been working in their favor lately is they are generating cash flow in excess of their capital expenditures. That's a bit of a rarity in the oil and gas business as of late. You could point to that being a bit of cash finagling with things like working capital and inventories and things like that, but it looks like they're on a much more solid foundation than they were a couple years ago. They've done a lot of asset sales, trying to trim off some of their less productive assets. They're really trying to focus on -- not growing production for the sake of growing production -- but really trying to look at disciplined capital management.
That's very helpful. At least that's what they're saying. BP's management has gone out saying, "Under the financial framework, our No. 1 priority is our commitment to the dividend." So if you're looking at a dividend play right now, yielding about 6% and with the clarity of the oil spill gone, it certainly helps a lot of BP's case. I'm not going to make a recommendation now because I do want to go back and look things over again, but it certainly is much more intriguing than it was yesterday afternoon.
O'Reilly: Very good. Well, thank you for your thoughts, Tyler. If you are an Industry Focus listener, we would love to hear from you with any questions or comments. Just email us at email@example.com. Again, that's firstname.lastname@example.org.
As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks. So don't buy or sell anything based solely on what you hear on this program. For Tyler Crowe, I'm Sean O'Reilly. Thanks for listening, and Fool on!
Sean O'Reilly has no position in any stocks mentioned. Tyler Crowe owns shares of ExxonMobil. The Motley Fool owns shares of EOG Resources, and ExxonMobil. 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.