Why BP plc’s Asset Shredding Will Crimp Earnings Growth

Royston Wild evaluates what BP plc’s (LON: BP) divestment programme is likely to mean for future earnings.

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Today I am looking at why I believe BP‘s (LSE: BP) (NYSE: BP.US) asset-shedding scheme is set to dent long-term earnings growth.

Asset sales to hinder growth potentialbp

BP has endured a multitude of difficulties in recent times. The oil leviathan saw underlying replacement cost profit collapse 27% during 2013, to £13.4bn, as a backdrop of weak refining margins, exploration write-offs and higher depreciation weighed on the bottom line.

The company continues to sling plenty of capital towards total organic expenditure to develop the next generation of earnings-driving assets, however, and 2013’s total rang in at $24.6bn. And the firm has announced that investment is likely to register at $24bn-$25bn in 2014, and $24bn-$27bn through to the end of the decade.

BP turned the tap on at three new major projects last year, and an additional five assets are expected to come online this year. Still, the business is becoming much more selective in where to invest in order to maximise shareholder returns, and notes that:

“Capital discipline is central to BP’s strategy; making the right investment choices, sticking to our capital limits, and actively managing our portfolio in pursuit of long-term value.”

Although a revised focus on quality rather than quantity is at face value good for shareholder returns, the scale of asset shedding could seriously undermine the group’s long-term growth prospects. BP completed a $38bn divestment programme back in October, and announced that it plans to sell another $10bn worth of assets by the end of next year.

The effect of such divestments pushed BP’s total production almost 3% lower during 2013, to 2.26 billion barrels of oil equivalent per day (boepd), and the company advised that further rounds of asset sales are likely to drive group output even lower this year.

Earnings turbulence expected to endure

BP has seen earnings fluctuate wildly in recent years as deteriorating oil prices, combined with a variety of operational problems, has weighed heavily. And City analysts anticipate further bumpiness over the medium term, with a 34% decline this year expected to be followed by a modest 4% rebound in 2015.

Such projections leave the oil play dealing on P/E multiples of 9.6 and 9.2 for 2014 and 2015 correspondingly, well within the generally-regarded value area below 10.

But with chronic oversupply set to drive oil prices plunging in coming years, ongoing divestments threatening long-term growth, and BP facing the prospect of severe financial penalties stemming from the 2010 Deepwater Horizon oil spill, the company is a highly risky stock pick in my opinion.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston does not own shares in BP.

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