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BP, One Year After the Spill: A Slick Buy?

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  • A Leaner BP is a Good Thing Financially

  • From the perspective of Argus Research analyst Phil Weiss, the sudden financial strength of BP is a plus, but a share repurchase wouldn't be his choice as a catalyst for BP shares. Weiss noted that BP lowered its debt as it has increased cash and the company wants to have financial flexibility given the oil spill liability overhang. The Argus Research analyst thinks the wisest use of a BP flush with cash is accelerated spending in exploration projects, especially if the Rosneft deal falls apart.

    Considering BP the cash cow and Argus Research analyst Weiss' comments about pouring cash into exploration leads directly to the recent asset divestitures made by BP.

    In the same way that Oppenheimer's Gheit argues the oil spill had the unintended, and good, consequence of forcing the BP dividend down, analysts believe that the oil spill pushed BP to sell off non-core assets quicker than it might have otherwise done, especially in the case of some specific asset sales that should have been made all along.

    "These large oil companies should be looking to sell off those assets they can't devote attention to, or put capital into, which are worth more in the hands of someone else," said Argus Research's Weiss. "There are so many other more lucrative projects, and it's better to monetize assets through regular asset divestitures. BP wasn't as aggressive as it could have been in selling assets before the oil spill," Weiss concluded.

    While BP was forced to sell, the so-called "fire sale" never occurred, says Oppenheimer's Gheit. In fact, BP was fortunate that it was a buying market and many wanted to make bids on its assets. "The seller got a fair price in my view and as a result BP is sitting on $24 billion in cash from sales with $6 billion more to go," the analyst said. "This company is not liquidating. This company is selling assets it believes to be much more valuable to others and BP wants to grow the company from a smaller and stronger base, with more financial flexibility," Gheit concluded.

    Raymond James analyst Molchanov added that the assets BP sold were generally low margin or low growth assets in places like Argentina, Vietnam and Pakistan. "The oil spill compressed the sales in a short period of time, and in that sense the oil spill was a catalyst to help BP take stock of its portfolio and re-conceptualize it. BP ends up with a high margin asset base," the analyst said.

    Indeed, the sudden cash bulge at BP raises the issue of whether BP's new management team led by CEO Bob Dudley can effectively deploy the cash. "More cash flow presents the opportunity to take capital and put it to good use -- and, on the other hand, the risk that the cash is mismanaged," Molchanov said.

    With earnings coming up on April 27, a big question for BP is what it does with the surplus cash flow that it didn't budget for, whether it's increasing the dividend, stock buybacks or increasing the spending budget.

    "The management responsibility here is to provide clarity on BP spending priorities," Molchanov said.
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