Are BP Shares Undervalued?

With shares of BP (NYSE:BP) trading around $41, is BP an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

BP is an integrated oil and gas company. The company provides its customers with fuel for transportation, energy for heat and light, lubricants, and the petrochemicals products used to make everyday items as diverse as paints, clothes, and packaging. It operates in two business segments: Exploration and Production as well as Refining and Marketing. BP provides essential energy products to consumer and companies worldwide. Without the oil and gas products provided, many consumers and businesses would not be able to operate on a daily basis.

BP is suing the Environmental Protection Agency in an attempt to get new government contracts, something the company’s been barred from since pleading guilty to criminal charges related to the Deepwater Horizon oil spill in 2010. BP claims it believed the suspension from government contracts would be brief, but the EPA refused to lift the ban even after the criminal case related to the Deepwater spill was closed. BP is hoping the court will determine the ban from government work is illegal and allow the company to return to supplying the military with fuel, among other government jobs.

T = Technicals on the Stock Chart are Weak

BP stock has been struggling in recent years as it attempts to recover from negative news. The stock is trading near lows of a range that extends for most of the year. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, BP is trading below its key averages which signal neutral to bullish price action in the near-term.

BP

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of BP options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

BP Options

16.70%

6%

4%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

September Options

Steep

Average

October Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on BP’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for BP look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

233.67%

192.30%

-78.97%

8.03%

Revenue Growth (Y-O-Y)

-0.74%

10.06%

7.51%

-4.72%

Earnings Reaction

-3.20%

2.28%

1.35%

2.78%

BP has seen rising earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have been optimistic about BP’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has BP stock done relative to its peers, Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDSA), and sector?

BP

Chevron

Exxon Mobil

Royal Dutch Shell

Sector

Year-to-Date Return

-0.67%

12.96%

3.21%

-6.25%

3.04%

BP has been a poor relative performer, year-to-date.

Conclusion

BP is an oil and gas company that supplies energy products and services worldwide. The company is involved in a suit with the Environmental Protection Agency. The stock has been struggling in recent years and is now trading at the bottom of its yearly range. Over the last four quarters, investors in the company have been optimistic as earnings have been rising and revenue figures have been mixed. Relative to its peers and sector, BP has been a poor year-to-date performer. WAIT AND SEE what BP does this coming quarter.

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