Will Recent News Hurt BP Stock?

With shares of BP (NYSE:BP) trading around $46, 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 said fourth-quarter profit fell from a year earlier as output declined and refining margins weakened. Profit adjusted for one-time items and inventory changes dropped to $2.8 billion from $3.9 billion a year earlier, the London-based company said in a statement. That matched the average estimate of 12 analysts surveyed by Bloomberg. BP follows Royal Dutch Shell Plc and Exxon Mobil Corp., the two biggest oil companies by market value, in reporting lower earnings as the cost of drilling rises, refining profits slump, and oil prices stagnate. Chief Executive Officer Bob Dudley has sold less profitable fields in the wake of the 2010 Gulf of Mexico spill and focused on profit margins rather than volume targets. “Capital discipline is central to BP’s strategy,” Dudley said in a statement. That’s “making the right investment choices, sticking to our capital limits, and actively managing our portfolio in pursuit of long-term value.”

T = Technicals on the Stock Chart Are Mixed

BP stock has not made significant progress in recent years. The stock is currently pulling back 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 between its rising key averages which signal 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

19.23%

60%

58%

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

March Options

Average

Average

April Options

Average

Average

As of today, there is an 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)

-25.74%

-33.55%

-233.67%

192.30%

Revenue Growth (Y-O-Y)

-28.21%

-50.71%

-0.74%

10.06%

Earnings Reaction

0.52%*

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 not been too happy about BP’s recent earnings announcements.

* As of this writing

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

-4.69%

-10.60%

-11.00%

-4.49%

-6.69%

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 said fourth-quarter profit fell from a year earlier as output declined and refining margins weakened. 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 displeased investors. Relative to its weak peers and sector, BP has been a relative year-to-date performance leader. WAIT AND SEE what BP does this quarter.

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