Is BP Well-Positioned for the Future?

With shares of BP (NYSE:BP) trading around $48, 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 firm provides its customers with fuel for transportation, energy for heat and light, lubricants, and the petrochemicals products used to make items like paints, clothes, and packaging. It operates in two business segments: exploration and production, and refining and marketing. BP provides energy products to consumers 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 was once again denied its request to halt payments of its $9.2 billion settlement with victims of the 2010 Gulf of Mexico oil spill. BP requested the delay so that it could propose and implement new accounting safeguards aimed at reducing fraud at the court-supervised claims administration, but U.S. District Judge Carl Barbier denied the request without further explanation on Tuesday, according to Bloomberg. BP was previously denied a similar request on grounds that the current accounting standards were ones that both the company and claimants had agreed to when they first settled. According to Patrick Juneau, the court-appointed settlement fund administrator, BP has so far paid out about $3.81 billion of the $9.2 billion class-action settlement it reached with Gulf-area victims of the spill.

These claimants mostly include businesses and individuals who suffered some sort of harm as a result of the spill. However, BP argues that the settlement office has paid out hundreds of millions of dollars in fraudulent claims because accounting controls are subpar. To address the issue, BP wanted to pause payments and implement software that would cross-check claims, as well as institute controls that would require additional identification from individual claimants seeking a payment. These controls were recommended by a court-appointed special master who reported that there were instances of fraud in the current system.

T = Technicals on the Stock Chart Are Weak

BP stock has not made significant progress in recent years. The stock is currently pulling back and may need time to consolidate before heading higher. 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 between its rising key averages, which signals neutral 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

17.69%

46%

44%

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

Put IV Skew

Call IV Skew

April Options

Average

Average

May Options

Average

Average

As of Wednesday, there is average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral 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 Decreasing 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 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-48.16%

-33.55%

-233.67%

192.3%

Revenue Growth (Y-O-Y)

-4.92%

-50.71%

-0.74%

10.06%

Earnings Reaction

0.34%

4.98%

-3.20%

2.28%

BP has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about BP’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

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

BP

Chevron

Exxon Mobil

Royal Dutch Shell

Sector

Year-to-Date Return

-1.05%

-7.56%

-7.27%

1.54%

-2.58%

BP has been a relative performance leader, year-to-date.

Conclusion

BP is an oil and gas company that supplies energy products and services worldwide. The company was once again denied its request to halt payments of its $9.2 billion settlement with victims of the 2010 Gulf of Mexico oil spill. The stock has not made significant progress in recent years and is currently pulling back. Over the last four quarters, earnings and revenues have been decreasing, which has left investors with conflicting feelings about recent earnings announcements. Relative to its weak peers and sector, BP has been a year-to-date performance leader. WAIT AND SEE what BP does this quarter.

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