My intent this week was to continue comparing the valuations of oil and gas companies with their year-end reserves, but the spreadsheet I am working on with our computer programmer isn’t quite ready. Hopefully in the next issue we can take a really deep dive to possibly find overlooked gems among the publicly traded oil and gas stocks.

Instead, this week I want to discuss BP (NYSE: BP) in some depth. At the beginning of each year, I make a series of predictions. This year, the prediction I have been asked most about is my call that “BP will be bought out or merged in 2015.” I consider this my most aggressive prediction for the year, primarily because my time frame is limited to 2015. I think the odds are pretty good that BP is taken over within the next few years, but predicting that it happens by year end is pretty aggressive.

Despite its much-publicized troubles (which I detail below), BP remains one of the world’s few publicly traded supermajor oil companies. A snapshot from the company website provides a glimpse into the breadth and depth of its operations:


But the BP brand has been seriously damaged after two high-profile accidents in the past decade. First came the 2005 BP refinery explosion in Texas City that killed 15 people and injured 170. The tragedy cost BP well over a billion dollars, tarnished the company’s image and ultimately resulted in the sale of the Texas City refinery to Marathon Petroleum (NYSE: MPC).

The financial toll of the Deepwater Horizon oil spill — which took place five years ago this week — was much greater. Eleven workers were killed in the accident, and an estimated 4 million barrels of oil were spilled into the Gulf of Mexico. The company already faces costs of $42 billion and potential fines on top of that that could push its tab to some $55 billion. The company will be tied up in the courts for years, and the BP brand will forever be tied to what is now the largest marine oil spill in history.

Following the 2010 accident, BP’s market capitalization was cut in half over the course of about two months as efforts to control the spill proved unsuccessful. In the aftermath, BP had to sell tens of billions of dollars in assets to meet its financial obligations. These divestments are ongoing. This week BP announced it’s seeking up to $2 billion for two batches of assets: interests in four pipelines and a gas plant along the Gulf of Mexico, and 15 storage terminals in the Midwest and on the East Coast.

Today, BP’s share price is still about 30% below its level just before the spill. Therein lies the appeal. BP’s oil and gas reserves are valued far below those of the other supermajors per unit of energy, and the share price trades at a discount to larger rivals like ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX).


EV = Enterprise Value in billions of dollars as of April 21, 2015
Reserves = Proved reserves in billion barrels of oil equivalents (BOE) at year-end 2014
Production = 2014 daily production in million BOE per day
RoA = Return on Assets
CR = Current assets for the most recent quarter divided by current liabilities for the same period

BP’s 3.2 million barrels of oil equivalent (BOE) produced per day in 2014 wasn’t that far behind ExxonMobil’s 4 million BOE per day. Its 17.5 billion BOE of oil reserves at the end of 2014 amounts to 69% of ExxonMobil’s 25.3 billion barrels, yet BP’s enterprise value is only 39% of Exxon Mobil’s.  

Note the EV/Reserves number for BP versus the other supermajors. Of course this is not an absolute apples-to-apples comparison, because each of these companies has businesses beyond oil and gas production. For instance, BP has substantial refining assets, and a huge trading group for oil and gas. But even if you valued those businesses at zero, the value of BP’s reserves is ridiculously low at $8.51/BOE.

Consider that the two largest pure oil producers (i.e., they lack BP’s refining and other integrated assets) — ConocoPhillips (NYSE: COP) and EOG Resources (NYSE: EOG) — trade at respective EV/Reserves values of $11.17/BOE and $22.72/BOE. (Incidentally, this is the sort of comparison I will do more of when the spreadsheet is finished.)

Several sources have reported that before Shell (NYSE: RDS-A) announced its $70 billion acquisition of BG Group (London: BG), it seriously considered bidding for BP. Shell is likely out of the picture now as it attempts to digest its new acquisition, but a Bloomberg story this week said “BP executives are concerned the company is vulnerable to an opportunistic bid” — with ExxonMobil and Chevron mentioned as the most likely pursuers. BP has reportedly stepped up internal reviews of takeover scenarios and simulations of defense strategies against a hostile takeover, but the company would have limited options if ExxonMobil came knocking.

There is no question that there is value there, but the ultimate potential legal liability is a deterrent. ExxonMobil of course has a lot of experience in surviving a major environmental disaster and the ensuing liabilities with the 1989 Exxon Valdez oil spill. Another potential deterrent mentioned in the article, however, is cultural — ExxonMobil doesn’t think too highly of BP’s internal practices and safety record. Finally, any such deal would likely face political opposition in both the U.S. and the U.K.

But the potential payoff is clear. An oil major exploring expensively for oil and gas can find some low-cost reserves right on BP’s balance sheet — if it is comfortable with the remaining potential legal liabilities.

We maintain a Hold on BP shares given the unsettled liability and the rising risk that drilling stocks could give back at least a portion of their impressive recent gains if crude’s rally stalls or reverses. Still, today’s price will probably prove to be a bargain for those with the risk tolerance and the patience to persevere until either BP’s legal challenges are behind them, or a competitor steps up to make a bid. I expect the latter, if not this year then within the next couple.    

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)