Can BP plc Make £20 Billion Profit?


Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.

Today I’m looking at BP (LSE: BP) (NYSE: BP.US) to ascertain if it can make £20bn in profit.

Have we been here before?

A great place to start assessing whether or not BP can make £20bn in profit is to look at the company’s historic performance. Unfortunately, BP has never been able to make £20bn, this includes 2007 when the price of oil hit a record $147 per barrel. What’s more, after the Gulf of Mexico Macondo well disaster, and subsequent asset disposals, it unlikely that the company will be able to make a profit of £20bn in the near future.

This being said, BP did report a net profit of approximately £14bn for 2013. However, profits are forecast to decline over the next few years as management continues to restructure the company. In particular, management is trying to slim down BP, concentrating on quality assets over quantity of oil produced.

In addition, BP’s management is still trying to raise funds to meet liabilities arising from the Gulf of Mexico disaster, which have so far reached nearly $50bn.

But what about the future?

As covered above, BP is no longer focused on size, instead the company is seeking quality over quantity. This has seen the company’s return on assets improve slightly from 6% to 8% over the past few years, despite volatile oil prices and claims related to the Macondo well disaster.

Still, now that BP is concentrating on quality assets, the company is returning more cash to investors, rather than spending on expensive exploration programs, which may or may not yield results.

Indeed, following the completion of the company’s $38bn divestment programme, announced during October of last year, BP expects to divest a further $10bn of assets by the end of 2015. The majority of the cash raised will be returned to investors.  

So with these asset disposals underway, it’s going to become increasingly hard for BP to drive profits higher over the next few years. As a result, BP is unlikely to meet my profit target of £20bn, considering that it is around 30% away from 2013’s £14bn profit.

Nevertheless, BP’s return of cash to investors should make up for sliding profits as buybacks drive earnings per share higher, which will support a higher share price.

Foolish summary

All in all then, I feel that BP cannot make £20bn profit. 

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In the meantime, please stay tuned for my next verdict.

> Rupert does not any share mentioned within this article.