With all of the headlines that I saw roll by this morning, prior to the release of the January employment surveys, one indeed caught my attention more than the rest. Perhaps it was because I had at one time been a misguided bull in one of the names involved. Perhaps it was because I felt that I had swung and missed on the other. You saw the story too. Palantir (PLTR) and BP PLC (BP) had extended their partnership to support the firm formerly known as British Petroleum as that firm works toward its oft stated ambition to be a net zero carbon emissions company by the year 2050... or sooner.
We are going to have to take BP seriously at this point. All of big oil has been talking the talk for some time now, but BP has been talking longer than have the rest and apparently is indeed also walking the walk. The relationship between BP and Palantir dates back to 2014. Palantir for those who still do not know, is a software company focusing on building enterprise data platforms meant to fine tune complex and sensitive data environments for use by clients trying to better focus on whatever they do and achieve whatever are their goals through data interpretation. Palantir's software platform can be made applicable to almost any industry, or even public sector purpose.
As these two firms expand on their existing relationship, Palantir will provide this platform to BP on a global scale in a multi-year, multi-million dollar deal. BP credits the relationship to this point as having provided positive results in management of operations, asset allocation, strategic planning, corporate procurement, infrastructure management, and the monitoring of workflow.
BP PLC
Long time readers will recall how I used to love, love, love BP. Oh, how I thought that name would be a winner. Fact is that I only got out a little better than even if one includes (and I do) all of the dividends paid and covered calls sold while holding the shares... and the shares still went much, much lower after I took my leave. There is probably a Risk Management 101 class in there somewhere, but we'll do that on another day. (Though it appears that a number of hedge fund portfolio managers have forgotten how to manage risk, either that or they were grossly underqualified for those positions to begin with.)
Earlier this week, on Groundhog Day, BP went to the tape with the firm's fourth quarter financial performance. BP... now I am going to slow this down, because this is unusual... reported adjusted EPS of $0.03, which missed consensus, but GAAP EPS of $0.40, and that number crushed the street. (Yes, you read that correctly.) Adjusted PBIT (profit as opposed to earnings before interest and tax) missed rather badly both for the upstream and downstream parts of the business. The positive adjustment stems from BP's interest in Rosneft and the amortization of deferred gains related to BP's divestment of the firm's interest in TNK-BP.
On that note, two days later, BP and Rosneft (of Russia) signed a cooperation agreement to work jointly on a number of projects including the development of low carbon technologies and the use of hydrogen. BP is Rosneft's largest non-Russian shareholder. BP has stated that the firm plans to sell $25 billion in assets by 2025 in order to pay down debt, but is unwilling to sell its stake in Rosneft. By the way, BP traded at close to $21 per share this morning, and still pays shareholders $1.26 annually. That's a 6% yield.
Palantir
Palantir went public last September and is off to a nice start. The stock roared into November and December prior to breaking out of that trading range and then returning to what had been a pivot at roughly $33. PLTR reports in about two weeks. Wall Street is looking for EPS of about $0.02 on revenue of close to $301 million. This would be revenue growth of 31.4%, which would be a significant deceleration from growth rates in the 40%'s to the 50%'s that the firm has been reporting going back prior to the public offering.
Potential investors should know a couple of things about PLTR. They are good at what they do. In January, the firm announced a partnership with PG&E (PCG) to use their platform to help improve operations and keep the state of California's electric grid running. (Yes, that's a thing.) Palantir is also a government contractor and is thought to have helped in the fight against terrorism. While that business could face an uncertain fiscal future here in the U.S., that impact may be felt even more significantly around the globe as Palantir does business for a number of governments.
In addition, two five star (TipRanks) analysts have rated PLTR at either a "sell" or their firm's equivalent over the past three weeks... Morgan Stanley's Keith Weiss and Tyler Radke of Citigroup. Much of the concern comes from uncertainty around contract renewals as businesses come out of a Covid environment. Even more importantly, and a potential really big deal is the lock-up expiration date. Earnings are due on Tuesday, February 16th, and the lock-up expires three days later, that Friday. There is in my opinion, heightened risk around that earnings call.
Conclusions
I think both firms afford opportunity. I have over the past year, really shied away from fossil fuels. Exxon Mobil (XOM) is my only "big oil" long right now. I think BP is trying to evolve and at this price level, and probably is not the worst oil stock to own. One would think that BP would defend the dividend with gusto going forward, but after cutting the payout in half last year, you do not know that. I would not own a lot of "big oil" but BP can be included as a small allocation to an overall sector exposure in line with that of the S&P 500, meaning sub 5%.
As for PLTR, I think I like it. Know what, not until the lock-up expires. What an interested investor could do is get long a bull call spread, let's say purchase Feb 19 $34 calls for about $3.50, while selling a like amount of Feb 19 $40 calls for almost $2. The spread comes with a debit of $1.50, which is why the investor then turns around and writes the same number of Feb 19 $29 puts for just about $1.50. Hence this whole strategy is free to the trader up front. The trader has purchased upside exposer and exposed him or herself to equity risk at the $29 level to pay for it.
