Investors: Is BP Finally Over the Gulf Oil Spill?

BP (NYSE:BP) is expected to report disappointing second-quarter earnings next week well behinds its peers. The company’s stock took a significant hit last year after the Gulf oil spill, and on top of that, production has declined as BP had to sell some of its oil fields to pay for costs relating to the spill.

With crude prices up 50%, BP is still expected to report a rise in profit, but its 21% jump to $6.0 billion is significantly less than the forecast 50% jump in second-quarter income for both Exxon Mobil (NYSE:XOM) or Royal Dutch Shell (NYSE:RDSA).

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Bob Dudley, who became chief executive after the oil spill, announced an emerging markets growth strategy earlier this year that would involve a $16-billion share-swap and multi-billion dollar Arctic exploration deal with Russia’s open joint stock oil company, Rosneft. But that deal was met by opposition from BP’s other Russian partners, TNK-BP, and ultimately fell apart.

Earlier this month, BP (NYSE:BP) decided to invest 3 billion pounds into extending its North Sea field at a time when investors have been pushing oil companies to look toward new prospective oil basins rather than declining reserves. Investors are going to want an explanation of Dudley’s plans for the company, and reassurance that the company’s stake in TNK-BP is no longer at risk.

“Investors feel that the company has slightly lost its way,” says Paul Mumford, fund manager at Cavendish Asset Management. “You need to have some clear guidance on where the company is going in the future, and how they are going to advance their strategy.”

After settling with equipment provider Weatherford (NYSE:WFT), which paid $75 million toward the cost of the spill, it looks unlikely that BP will be charged with gross negligence, which could have cost the company tens of billions of dollars. And BP’s partner in the well, Mitsui, contributed $1 billion to clean up efforts. But despite the spill’s being staunched last September, BP’s share price hasn’t grown as analysts had predicted. BP’s current market capitalization is 50% below the value of its assets, according analysts at Bank of America (NYSE:BAC) Merrill Lynch.

While most companies in BP’s situation would consider a sale, it’s an unlikely option for BP. Few oil companies are large enough to take on BP, and those that are — state-owned Asian energy companies — would probably be blocked by the U.S. government from taking over BP because of its U.S. assets. Its rivals Chevron (NYSE:CVX), Exxon, and Shell also have the means to buy the firm, but are unlikely to do so while BP is still facing legal action.

Maybe BP should take its cue from ConocoPhillips (NYSE:COP) and spin off its oil refining and fuel retail units. When ConocoPhillips announced its plan to do so last week, its shares got a nice boost. However, very little of BP’s capital is tied up in refinery operations as the company has been selling them off over the last decade. So analysts are saying maybe the firm should spin off its U.S. assets into a new company, sell its Russian unit TNK-BP, and create another company out of BP’s foreign assets.

But with lawsuits that could potentially cost BP (NYSE:BP) tens of billions of dollars still underway, a breakup of the company is not practicable at this time, though as the firm settles its biggest cases, that may change.