Oil giant BP Plc (BP) grabbed headlines this morning with the announcement that it’s selling some of its offshore oil fields in the Gulf of Mexico to Plains Exploration and Production Co. (PXP) for $5.55 billion. BP Plc also expects to sell its Texas City Refinery by the end of 2012. This is all part of a larger plan to raise $38 billion by the end of 2013 to pay for cleanup and settlement costs related to the Deepwater Horizon incident two years ago. To date, BP has agreed to sell $32 billion of its assets.
And it looks like the company will need every penny of these proceeds. Just last week, the U.S. Department of Justice charged British Petroleum of “gross negligence” as it sought to increase the damages paid by BP. BP has reached a $7.8 billion settlement with private sector victims, but if the gross negligence charge is upheld, BP could pay an additional $21 billion on top of existing damages. That represents a hefty chunk of the $26 billion in profits made during all of 2011. With this kind of uncertainty hanging over BP Plc’s head, there’s no question you’ll want to stay away from this D-rated stock.
Today also brought another big oil deal from Transocean Ltd. (RIG), which was the other big player in the BP Oil Spill and is also under scrutiny from the DOJ. Transocean has agreed to sell 38 shallow water drilling rigs to Shell Drilling Holdings Ltd. The $1.05 billion price tag also includes transportation support services while Shell Drilling adjusts to its new assets. This sale takes a sizeable chunk out of Transocean’s current fleet of 115 mobile offshore drilling units. And because Shell Drilling is getting a relative bargain out of this (the assets are worth about $1.4 billion together), Transocean will report impairment charges during its next earnings announcement. On top of this, Transocean has just been served with an operating ban in Brazil, which is where 10 of its active rigs are located. If Transocean cannot overturn this ban, drilling will stop in the next month or so. So as with BP, I have RIG down as a D-rated sell.
Of course, the big reason why these two companies are so down in the dumps is the fallout from the 2010 oil spill, so I don’t want you to think that you have to stay away from oil wholesale. In fact, I have three A-rated energy plays that each bring something different to the table—visit my Portfolio Grader website for these three names.