Does BP Have A Bright Future?

With shares of BP (NYSE:BP) trading around $47, 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.

The U.S. Circuit Court of Appeals in New Orleans has given BP new hope that the manner in which restitution payments for the Gulf of Mexico oil spill are awarded can be changed. According to an order issued Thursday, U.S. District Judge Carl Barbier has thus far ignored the appellate court’s October ruling that he must review causation of the financial losses when determining which claims to pay. However, BP won expedited consideration for its request to block the oil spill compensation payments unless the claims can be proven to be for losses caused by the spill. U.S. Circuit Judge Edith Brown Clement ruled that victims must respond to BP’s motion by January 8, and lawyers for both BP and the victims must file letters regarding the issue of causation, Bloomberg reports.

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 stabilize 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 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

17.89%

80%

78%

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

Put IV Skew

Call IV Skew

February Options

Flat

Average

March 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 significant 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 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-33.55%

-233.67%

192.30%

-78.97%

Revenue Growth (Y-O-Y)

-50.71%

-0.74%

10.06%

7.51%

Earnings Reaction

4.98%

-3.20%

2.28%

1.35%

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

P = Average 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

-0.56%

-0.05%

-0.94%

0.01%

-1.38%

BP has been an average relative performer, year-to-date.

Conclusion

BP is an oil and gas company that supplies energy products and services worldwide. The U.S. Circuit Court of Appeals in New Orleans has given BP new hope that the manner in which restitution payments for the Gulf of Mexico oil spill are awarded can be changed. The stock has not made significant progress in recent years and is currently pulling back. Over the last four quarters, earnings have been decreasing while revenues have been mixed, which has left investors with mixed feelings about recent earnings announcements. Relative to its weak peers and sector, BP has been an average year-to-date performer. WAIT AND SEE what BP does this quarter.

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