Is BP a Safe Investment?

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 dropped plans to invest in a refinery in China and “dismantled” a team assigned to the project late last month, said the International Energy Agency. BP had considered investing in the 200,000 barrel-a-day Qinzhou plant operated by PetroChina, according to the IEA, an energy adviser to developed nations. The refinery in the southern province of Guangxi started operations in 2010 and is currently being upgraded to handle a wider range of feedstock, it said in its monthly Oil Market Report today.

David Nicholas, a BP spokesperson in London, declined to comment on the report today. Chinese and international oil companies are reconsidering their refinery-investment plans as the Asian nation’s oil consumption expanded at the slowest pace in six years in 2013, according to the IEA. About 4.3 million barrels a day of primary distillation capacity was scheduled for completion by 2018, “by far exceeding” demand projections, it said. “Growing concerns over the risks of oversupply in the Chinese fuels market have led at least four projects to be canceled in recent months,” according to the report.

T = Technicals on the Stock Chart Are Mixed

BP stock has not made significant progress in recent years. The stock is currently trading sideways and may need time to consolidate. 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 above its rising 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

16.66%

0%

0%

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

March Options

Flat

Average

April Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish 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 bullish 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%

192.30%

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), Royal Dutch Shell (NYSE:RDSA), and sector?

BP

Chevron

Exxon Mobil

Royal Dutch Shell

Sector

Year-to-Date Return

-0.46%

-10.00%

-9.92%

-0.51%

-4.22%

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 dropped plans to invest in a refinery in China and “dismantled” a team assigned to the project late last month. 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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