Today I am examining the case for investing in fossil fuel giant BP (LSE: BP) (NYSE: BP.US).
US producers continue to cork
The eye-popping decline of the oil price remains has been THE financial market story of the past six months, the Brent benchmark having slumped to its cheapest for more than five years in January just above $45 per barrel.
Although prices have conceded almost half their value from July, Brent has recovered some ground in recent weeks on the back of rapid scalebacks in the US shale sector, a phenomenon which has helped the price rise almost a third since then.
Promisingly for BP and its peers, latest Baker Hughes data last week confirmed that North American workers continue to down tools in their droves, with the number of oil rigs in operating falling by 37 to 1,019 in the week to February 20. This compares starkly with the 1,425 rigs just a year ago.
But supply looks set to remain abundant
The oil industry hopes that the effect of these project scalebacks will provide an uplift to the oil market’s supply/demand imbalance around the middle of next year. However, the sector still faces a multitude of other issues which could dampen the effect of reduced US output.
Just last week the Organisation of Petroleum Exporters (OPEC) vowed to increase its output by 400,000 barrels per day in 2015, a move designed to bolster its dominance of the world oil market. This moves comes in spite of rising global stockpiles, and data from the US Energy Information Administration last week showed crude inventories hit their sixth consecutive record high, up 7.7 million barrels week-on-week to 425.6 million barrels.
With conditions on the world’s factory floor of China also continuing to worsen, and political and economic worries in the eurozone rising by the day, oil supply looks set to keep outstripping off-take for some time to come.
Deepwater concerns darken the waters
As well as the threat to its revenues outlook, BP is also facing extreme financial implications relating to the ongoing Deepwater Horizon legal saga which stretches back to 2010.
Last week the business failed in its challenge to cut the maximum fine related to the disaster from $13.7bn, with a US judge ordering that the BP should pay up to $4,300 per spilled barrel. This is far above the $3,000 limit the oil firm had been seeking, a figure which would equate to a $9.57bn penalty.
This follows a ruling by the Texas Supreme Court that BP is not covered by the insurance policy of Transocean — owner of the Deepwater Horizon rig — a decision which prevents the London-listed firm gaining access to $750m to cover its colossal costs, a figure which currently stand at more than $42bn. Indeed, BP faces an uphill battle to reduce this figure as US authorities continue to play hardball.