NEW YORK (TheStreet) -- Although other exploration and production oil companies can look to a bright future past the temporary trough in oil prices, for BP (BP)  the challenges put that prospect in doubt.

Shares of the oil giant have lost more than 11% in the past three months. Although shares of other leading oil producers have also fallen, they have fared better: Shares of Chevron (CVX)  and ExxonMobil  (XOM)  declined by 7% and 3%, respectively, during the past three months. 

BP's latest earnings results didn't meet market expectations, as the company's adjusted earnings per share came in at just 99 cents, 20 cents below analysts' consensus estimates and 18 cents below those reported a year earlier. Lower oil prices have contributed to the decline in the company's profitability, as indicated in the chart below.

Source of data: Google finance and EIA

Additional issues that adversely affected BP's bottom line include higher effective tax rates and a 0.7% decline in its production, year over year.

Also, the company's earnings from Russian oil and gas producer Rosneft were just $107 million. By comparison, in the second quarter, the profit from the Russian company was a little more than $1 billion.

U.S. and European sanctions on Russia, due to the country's feud with Ukraine, have already hurt Rosneft's bottom line.

In the third quarter, the company's net earnings were just 1 billion Russian rubles or about $21 million. A year earlier, its earnings were 143 billion Russian rubles or about $3.1 billion.

In addition, the ruble has devalued by nearly 16% since the end of the second quarter. The continuing depreciation of the ruble may contract BP's profits that it will record from Rosneft.

But the drop in BP's earnings didn't stop the company from further paying back its investors by repurchasing stocks. In the past quarter the company bought $1.6 billion worth of shares.

BP also raised its quarterly dividend to 60 cents a share, bringing its annual dividend yield to 5.5%. By comparison, Chevron offers a 3.6% annual yield, while Exxon Mobil provides shareholders with a 2.9% annual yield.

Besides falling oil prices, the associated risk that BP shares have with the company's investment in Rosneft and failing to reach market expectations in its latest earnings report, the company is still dealing with the ramifications of the 2010 Gulf of Mexico oil spill. BP may face additional an $18 billion penalty for this in pollution fines.

Up to now, the company allocated $42 billion for the oil spill and spent nearly $28 billion in cleaning, fines and restitution for businesses and people that were adversely affected by the oil spill. In case the additional pollution fines will exceed the above-mentioned allotment, this could mean that BP will have to sell additional assets.

On Oct. 2, BP filed a motion for a new trial or to amend the court ruling, in which the company was found liable for negligence for the oil spill.

The company claimed "...that the district court allocation of fault and findings of gross negligence and willful misconduct relied upon testimony which had been excluded from the evidence presented at the Phase 1 trial."

The penalty phase of this trial, in which U.S. District Judge Carl Barbier will rule on how much oil was spilled, is expected to start in January.

The results of the court ruling are preventing BP's stock from recovering. 

Despite the lower earnings from Rosneft, falling oil prices and the risk related to the oil spill, BP continues to pay its investors via dividends and shares buyback. The risk related to the final amount that BP will pay for the oil spill is likely to keep haunting the company's stock over the near term.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates BP PLC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate BP PLC (BP) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its reasonable valuation levels, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and poor profit margins."

You can view the full analysis from the report here: BP Ratings Report

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