Last week, the “supermajor” oil company BP Plc (NYSE: BP) reported a swing to profit in the fiscal 2016 fourth-quarter, compared with a net loss in the similar quarter of fiscal 2015. The company also reported a y-o-y increase in fourth-quarter revenues. However, the quarterly results did not deter the investors from selling the stock, which closed at $34.66 on Monday. The facts presented below provide the reasons for investors to have a bearish view of the stock.
The London-based multinational oil and gas company reported an increase in fiscal 2016 fourth-quarter revenues to $51.01 billion, from $49.17 billion in the similar period last year. The Q4 revenues were 7%, or about $360 million, lower than consensus estimates of Thomson Reuters.
For the fourth quarter, the net profit attributable to BP was $497 million or $2.60 per share (0.16 per ADS), compared with a net loss of $3.31 billion or $18.01 per share (1.08 per ADS) in the corresponding quarter last year.
The underlying replacement profit, a key measure used to assess oil companies, doubled to $400 million or $2.11 per share (0.13 per ADS) in 4Q16, from $196 million or $1.06 per share ($0.06 per ADS) in 4Q15.
The fourth-quarter underlying replacement profit missed analysts’ estimates of $560 million. The investors’ concern does not stop with this. The management of BP stated that it requires the price of crude oil to be at least $60 per barrel in order to offset expenses (capital expenditures and dividend payments), and stay cash positive. This compares with a price range of $50 to $55 per barrel provided a year earlier.
In the fourth quarter, the company took a charge of $799 million related to the deepwater horizon (Gulf of Mexico) oil spill that took place in 2010. As of date, BP has lost about $62.6 billion related to this disaster. The company states that it may incur additional charges in the coming months, albeit lower.
The downstream segment reported a 28% decline in the fourth-quarter underlying replacement profit to $877 million, from $1.22 billion in the similar quarter last year. On the other hand, the leverage ratio has increased to 26.8% at the end of fiscal 2016, compared with 21.6% a year ago. The company stated that it does not anticipate any significant improvement in margins in 2017. Thus, fundamentally, we forecast a downtrend in the stock.
The price chart indicates that the stock has broken below the support level of 36, with a negative gap. The next support for the stock exists at 33. The bearish scenario is also reflected by the negative reading of the MACD indicator.
So, trading a put option contract would be prudent at this point in time. The binary trader can go ahead and invest in the suggested contract as long as the stock of BP does not trade below $34.50 in the equity market. The trader should also ensure that the contract remains valid for at least seven days from the time of investment.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
