One of the biggest oil giants in the world may be going down…British Petroleum (BP (NYSE:BP)) has been run through the wringer ever since the disastrous oil spill in the Gulf of Mexico back in April 2010. Since then, the company has faced a barrage of lawsuits and bad publicity.
And now, the U.S. Justice Department is seeking fines as high as $20 billion for alleged negligence. Eventually, though, a company can’t shoulder the burden of billions of dollars in fines and legal costs, and is forced to choose the path of least resistance. Is bankruptcy the only option left for this oil supermajor?
Staying Strong
The problem with BP is that it makes money – lots of it – and the federal government wants a piece of the action. After all, there’s nothing like sticking it to “Big Oil” to cultivate a popular profile.
The company has already put aside or paid close to $40 billion related to the spill. Much of that came from cash on hand, income, and the sale of assets.
Yet, even after that massive set aside and sales, the company has been able to increase its dividend, pursue a share buyback, and increase its share price.
If BP’s appeals are met favorably, the fine could be as low as $5 billion. But that’s still no small number.
Therefore, I’m sure filing for bankruptcy has been thrown around the BP boardroom. But the company does have the ability to generate the cash to pay off the potential fine through a combination of internally generated cash and the acquisition of debt.
Its balance sheet isn’t that highly leveraged, and it will generate in excess of $30 billion in cash flow this year with more than $10 billion in net profits.
As you can see in the share price chart below, shares dropped to $27 after the spill in 2010 and have since more than doubled before retreating to $46. That’s a 70% rise in less than four years. Dividends were suspended in 2010 and are now more than $2.40 per share.
It appears BP made good on its promise to clean up the mess and restore the communities affected by the spill. Record numbers of tourists are visiting the beaches and patronizing businesses.
Still, BP shares will be burdened for months to come.
The dividend may come under pressure if the ultimate settlement is on the higher end of the scale, while a lower settlement (under $10 billion) will probably be viewed as a positive development.
Get It While It’s Low
For shareholders and new investors, any weakness in BP shares – especially as a result of bad publicity – presents an opportunity to buy the company’s highly desirable stocks while prices are low.
The fine in question could be very large, but the company has already proven that it can pay twice that amount and still return profits to its shareholders.
And BP is still a hugely diverse and profitable company.
It has operations ranging from shale plays on the U.S. mainland to its still-prolific Alaska and Gulf of Mexico reserves. Outside the United States, the company has ongoing interests in Russian oil giant Rosneft, which, while politically iffy right now, is paying the company billions in dividends. Plus, the company is a frontline player in the global liquid natural gas boom.
BP shares are in for uncertain times in the months and years ahead. Savvy investors should look at this as an opportunity to accumulate on a weakness.
And “the chase” continues.