BP (NYSE:BP) is set to come out with its Q2 earnings on July 31 as its competitors have largely reported sharp declines in upstream earnings because of low oil and gas prices. Low prices could have a more severe impact on BP, which has seen a sharp drop in production levels since the 2010 Gulf of Mexico incident, forcing the company to divest its assets in order to fund the expenses related to the spill. The earnings event could also shed light on the ongoing talks between BP and Rosneft over the sale of BP’s stake in TNK-BP, which accounts for about 40% of BP’s oil output.
We are looking to revise our $60 price estimate for BP, which is at a 45% premium to its current market price.
Natural gas prices in the U.S. fell below $2 / Million British thermal units in Q2 because of a mild winter, which lowered demand for the commodity. Prices also dropped on fears that the oversupply situation could lead to the country running out of storage for natural gas. The sharp drop in prices has resulted in companies reporting a fall in upstream earnings in the U.S. Earnings have also been impacted by lower oil prices in the international markets. This should be compounded by the drop in BP’s production volumes over the last two years as it has sold assets to cover expenses related to the Macondo spill.
One of the significant developments for BP over the past few weeks has been the announcement that it is looking to sell its stake in TNK-BP. The energy major is reportedly in talks with Russian state oil company Rosneft in a deal that could fetch around $25-$30 billion. Analysts expect that such a deal could also include a possible partnership between BP and Rosneft to explore Russia’s remote Arctic reserves. The two companies were in talks over such a partnership last year, before objections from TNK-BP’s Russian stakeholders. A possible deal could have a significant impact on BP’s production volumes over the long term.