Will BP plc Survive In A Low Oil Price World?

Life as a BP (LSE: BP) (NYSE: BP.US) investor has been incredibly tough over the last handful of years. Firstly, there was the tragedy of the Deepwater Horizon oil spill, for which BP is still making compensation payouts. Then there was weakening investor sentiment following the decision to impose sanctions on Russia, with BP’s near-20% stake in Rosneft causing investors to become concerned about its long term future in the country.

And, in the last year, BP’s future profit potential has taken a further hit due to the decline in oil prices, with the company’s CEO, Bob Dudley, stating that a low oil price environment appears to be the ‘new normal’ and is here to stay over the medium term.

Relative Performance

As a result of a lower oil price, BP’s bottom line slumped by 83% last year. Clearly, that is a hugely disappointing result but, when compared to a number of the company’s sector peers, was a relatively strong performance. In fact, many oil and gas producers across the globe reported a loss in 2014, as lower revenue and significant asset write downs led to a red bottom line. However, BP was able to avoid such a fate and, looking ahead, it could prove to benefit from the current outlook for oil.

Financial Standing

That’s because BP remains a financially very secure business. Certainly, it is smaller than it was prior to the Deepwater Horizon oil spill and appears to have more modest ambitions than in previous years. However, with excellent cash flow (net operating cash flow has averaged $25bn per annum in the last three years) as well as a balance sheet that is only modestly leveraged (BP has a debt to equity ratio of just 47%), the company could set about expanding its asset base over the medium term.

In fact, that is a strategy being pursued by a number of BP’s global peers, such as Shell which recently made a bid for BG. And, it appears to be a very prudent one, since although oil and gas companies are enduring a challenging period, efficiencies are likely to be made and costs are likely to be cut so that profitability should improve over the medium to long term. As such, BP is in a great position to not only survive a period of lower oil prices, but also increase its market share and improve its long term earnings growth profile through M&A activity.

Looking Ahead

Clearly, BP is a company with many major problems at the present time, as previously outlined. However, with its shares trading on a forward price to earnings (P/E) ratio of 13.4 and having a yield of 6.1%, they appear to offer a sufficient margin of safety so as to take into account the challenges faced over the medium term. And, with the scope to position itself as a stronger entity relative to its peers, BP’s long-term outlook appears to be very positive.

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Peter Stephens owns shares of BP and Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.