Can asset divestiture plan help bp plc (adr) in 2016_

As crude oil prices have dropped by more than 60% in the past 20 months, analysts at Nomura believe Big Oil companies are experiencing a “multi-year transition.” Despite the recent rally in crude oil prices, the sell-side firm said that the industry is very optimistic about the price recovery.

The increasing global crude oil supply, coupled with low commodity demand from China and other emerging economies has pressurized the crude market. Crude oil prices, which were above $110 per barrel in June 2014, have dropped to their multi-year low. Earlier this month, the market heaved a sigh of relief as the de facto leader of Organisation of the Petroleum Exporting Countries (OPEC), Saudi Arabia, and Russia entered into a deal to freeze crude oil production at January level. Other OPEC members, including Qatar and Venezuela also joined the agreement.

Although the growth in crude oil demand is currently slow, the long-term growth energy demand seems positive. The expectation that global oil demand will eventually recover has pushed investors to believe that the gap between oil supply and demand will narrow down by the end of this year and that crude oil prices will rally in the near future.

However, the research firm, Nomura believes that investors are highly positive about the degree and timing of crude oil recovery. In order to protect its large market share, Saudi Arabia will continue to increase its production, the research firm believes. The high crude oil production from Saudi Arabia and other OPEC members is just going to add more problems for the market.

Moreover, Iran’s commitment to surge its output after the recent removal of international sanction is adding more downside risks for crude oil market. Although Iran warmly welcomed the Saudi Arabia-Russia agreement, the oil-rich country has not given its approval to join them. Currently, the country just wants to re-establish its oil and gas industry.

Under the prevailing crude oil market conditions, Nomura says that European energy companies have outperformed their US counterparts. The European STXE 600 OIL+GAS PR. EUR (INDEXSTOXX:SXEP) has outperformed the global market 9% year-to-date (YTD), it added.

Analysts at Nomura evaluated the performance of Big Oil on four factors, these include; their implied cash flow and short-term dividend payment, cash from growth projects, asset offloading and cost reduction plan, and financial and operation resilience. Based on these factors, the sell-side firm’s top pick is French oil giant, Total, against Exxon Mobil Corporation ( NYSE:XOM), Chevron Corporation (NYSE:CVX), Shell, and BP. BP plc

Nomura has rated BP plc (ADR) ( NYSE:BP) “Neutral” based on the company’s upstream and downstream business. In low oil environment, the company’s upstream segment has been resilient, while its downstream business is performing well, the analysts said. The high refinery margins positively impacted its downstream segment last year. Will BP’s Cost Cutting Plan be Enough?

Earlier this year, the top rating agencies, Moody’s and S&P have downgraded a number of oil and gas companies over concern that “lower for longer” low crude oil prices is likely to adversely affect their liquidity position. As BP does not plan to reduce its dividend payment in low oil environment, the sell-side firm believes, the rating firms will closely monitor BP’s cash outflow this year. The company’s cash outflows are expected to increase because of the Deepwater Horizon oil spill settlement agreement, dividend payment, and multi-billion dollar capital spending.

In 2015, BP lowered its capital spending by almost 18%. The energy company made capital investment of $19.53 billion last year, in contract to $23.78 billion a year earlier. In 2016, the company expects capital expenditure (capex) to stand around $17—$19 billion. The research firm believes that although BP has been exceptional with its cost cutting program, the London-based company might have to further reduce its spending to improve its liquidity position.

Though BP plans to reduce its capital and operating spending in low oil prices, the company is determined on maintaining its shareholders’ dividend payment. For the next 12 months, the dividend yield is expected to stand at 8%.

In October, BP entered into $20.8 billion settlement agreement with federal and state governments for 2014 Gulf of Mexico oil spill. With crude oil prices hovering around $40 per barrel, the Macondo cash outflow of $3—4 billion will lead to BP’s cash burn in 2016, the research firm believes.

In the fourth quarter of fiscal year 2015 (4QFY15), the expenditure related to the oil spill was around $443 million. While for the full year, the expenditure related to accident stood at $11.96 billion. This year also the settlement agreement is expected to weigh down the company’s financial position as BP has agreed to pay more than $1 billion each year for the next 18 years. Asset Divestiture Program

In low oil and gas environment, many energy companies are selling their assets to raise funds to finance their expenditures. Last year, Total announced to sell $10 billion worth of assets between 2015 and 2017, while following its mega-merger with BG Group, Royal Dutch Shell plc (ADR) ( NYSE:RDS. A) has announced to divest $30 billion worth of assets.

Nomura believes BP might also have to offload $3—5 billion worth of assets this year to improve its financial position. The assets sell-off plan will help the company to increase its cash reserves and to bolster their balance sheet position. Moreover, we believe the plan would also save the energy giant from borrowing money from third parties to finance its dividend, Macondo cash outflow, or capital spending.

Though asset divestiture program is likely to help the oil and gas company survive the current and future market conditions, Business Finance News believes BP might find it hard to offload its stake in low oil environment. The commodity market crash have adversely impacted the cash flow of international oil companies. Thus, many few companies are currently ready to buy assets or to invest in new energy projects.