BP: The Future Looks Promising

| About: BP p.l.c. (BP)


Rosneft transaction is completed and gives BP the advantage of exploiting the large oil reserves in Russia better than any of its peers.

Huge capital expenditure of $25 billion planned for 2014 with focus on upstream (80% allocation).

Two new projects in North Sea to add 250 MBOED of production. Whiting (refining) facility to be modernized and will now make high margin products due to heavy crude capability.

BP is one of the six oil and gas "Supermajors" and the 5th largest oil and gas companies in terms of revenues. It is a fully integrated company with activities across all areas including exploration and production (E&P), refining, distribution, marketing, petrochemicals, power generation and trading.

Two Upstream Start-ups in 2014 and Four Expected in the Latter Half

The year 2013 was important for BP as three exploration projects started in the year. Three more projects were brought online in Jan and Feb of 2014. The company expects another four major upstream projects in the latter half of 2014.

BP continued its divestment plans to pursue a move towards high value projects. As a result the net income went up from $11.5 billion in 2012 (diluted EPS of 3.63) to $23.4 billion (diluted EPS of 7.39) in 2013.

Significant developments were made during the year that enhanced the company's performance in FY2013. The culmination of the transaction for Rosneft (OTC:RNFTF) in 2013 gave the company a stake in the already well-established E&P company. This gave BP a firm footing in Russia, believed to have one of the highest oil reserves in the world. The commissioning of new units and modernization of the Whiting refinery was another progressive step that would improve product margins.

Source : Company presentation, "Investor Update"

Rosneft deal to give BP a firm footing in Russia

Source : Company presentation, "Investor Update"

BP has a 19.75% equity share in Rosneft which added ~1 million BPD of production and 6.6 billion BOE reserves to the company. BP would also benefit from the large capital expenditure planned by Rosneft and its partners worth ~14 billion in the first phase of Russian shelf exploration in the coming period.

With the inclusion of Rosneft the company boasts a production of ~3.2 MMBOED and reserves of more than 17 billion BOE, presently the second highest production among its peers. Russia is a vital resource base for BP and gives it an edge over its peers with the highest production in this region. In 2013 the net production for BP in Russia was 961 MBOED which was far more than the rest of its peers, with Total behind with only 192 MBOED. BP also has the highest reserves in Russia with 14.3 billion BOE while its next closest peer, Total, only has 2.8 billion BOE. This gives the company an advantaged position that will continue to benefit the company in the upcoming years.

Capital Expenditure

A large capital expenditure is planned for the year with almost 25 billion to be spent on the company's upstream and downstream businesses. The primary focus is on E&P activity to which 80% of the capital expenditure has been allocated because it is a higher value venture. From 2015-2018 the company also plans to spend another ~25 billion on new start-ups and turnaround ventures. A few details of the projects are covered below. The figure below gives a breakdown of the expenditure between the upstream and the downstream segments.

Source : Company presentation, "Investor Update"

Gulf of Mexico

The company is operating four major hubs in the vicinity: Thunder horse, Atlantic, Mad Dog and Na Kika. The assets have currently only produced up to 20% of their resource base. Hence there is a lot of potential for the region in the foreseeable future. Continued developments and revitalized activity has resulted in the highest production from this area in 2013. This progress is expected to continue in 2014.

A second well in Na Kika is expected to start production later this year. Good results from the first well in the same location also present encouraging signs. Further new infill drills are being installed across BP'S non operated assets in Mars, Ursa and Great White and the company is developing new resources in the south through expansion projects.

US Lower 48 Onshore Business

In 2014 BP plans to separate its important resource base in the US lower 48. It will still be owned by BP but run independently under new management with complete control to carry out its business independently. The company's primary focus will be to develop the midstream business and gain from the advantaged shale positions. This is expected to bring positive results for this region in the upcoming year.

New projects in the North Sea

The Quad 204 is now ~60 complete and nearing its final construction and commissioning stage. It has a total production capacity of 130 MBOED and water injection capacity of 570 MBD. The Clair Ridge project is also ~60% complete. The massive Clair field development would add another 120 MBOED to the total production capacity. Both projects are expected to start field installations in 2015.

Whiting Refinery

The company aims to re-vamp this facility and increase its heavy crude capability to ~80% from the current ~20%. Old sulphur units will be provided with full heavy crude oil capability. The enhancements are on track to be completed by the second quarter of 2014 giving a positive outlook to the company for the latter half of the year.

The WTI - heavy Canadian differential has been widening. A spread of $20/bbl gives BP the ability to generate a cash flow of over $1 billion per annum. Hence if the spread is higher in 2014 this segment can provide BP with healthy cash flows to aid its high capital expenditure appetite.

Whiting has a key location which gives it a geographic advantage. It takes advantage of the Brent - WTI spread and also benefits from the differential with Canadian crudes due to high production capacities near the inland market for products. With this development the company is on track to grow its operating cash flow by more than 50% through 2011-2014, assuming a $100 oil price.

Source : Company presentation, "Investor Update"

Concluding Remarks

In 2014 BP is confident that it will deliver an operating cash flow of $30-$31 billion (at $100/bbl) that will be 50% higher than the previous year. We can expect higher margin production to grow with the revamp of the Whiting project and 3 major upstream projects are expected to be brought online later this year.

The continued divestment plans of the company will continue to add value and shift BP's focus on higher growth projects. The company is also carrying out a share buyback program with its recent TNK-BP sale worth $7.2 billion which will add value for shareholders. Hence the stock presents a strong upside due to the vast growth prospects of the company with additions to its upstream business and focus on high value downstream segment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article.