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Summary

  • BP has 4 major upstream projects that are expected to contribute to production during the current year.
  • The company plans to spend around 25 billion on new start-ups and turnaround ventures during 2015-2018.
  • BP has been the largest investor in the Gulf of Mexico. The start-up of the Na Kika Phase 3 project highlights significant growth opportunities around its four major operated hubs.
  • BP plans to give a boost to production by investing in the non-operated production hubs, such as Mars, Ursa and Great White in the Gulf of Mexico.
  • The separation of the U.S. Lower 48 onshore business will not only improve the operating efficiency of the region, but will also allow it to exploit the region's resource base.

British Petroleum (NYSE:BP) yields 4.7%, but that doesn't make it an appealing enough stock for some investors. The company's fourth-quarter featured net income was down 30% compared to last year's level, due in part to weak refining margins, its divestment program and deep-water spill-related costs.

To date, BP has sold around $40 billion worth of assets to cover cleanup and legal expenses. Outside of direct costs of cleanups and litigation, it also has to face the consumer backlash. Sales at the company-operated gas station fell by 40 percent. Consequently, it has to spend aggressively on marketing to restore its image. The biggest financial blow to the company was the suspension from doing business with the U.S. government. This dropped BP from the second-largest oil company by assets to the fifth. The effects of the oil spill were still evident even in the fourth quarter last year. As a result of downsizing, it is now producing less oil, and consequently, its revenues and profits both declined in the latest quarter.

However, in order to recover its lost ground, the company has taken certain initiatives, such as divesting its U.S. onshore business and the start-up of the Na Kika Phase 3 project. BP started production on as many as five projects alone in 2012; during 2013, it started 3 more projects. Going forward, BP plans to bring another 6 projects online by the end of the current year. The figure below demonstrates the project start-ups during 2013 and during the first three months of 2014.

Source: Company's Press Release; Trefis.com

BP started deriving production from the West Chirag platform in January this year. The platform has a capacity of 183,000 barrels of oil per day. Similarly, in January, Shell (NYSE:RDS.A) started its Mars B project in the Gulf of Mexico, and it is expected to produce up to 100,000 boe/d by 2016 from the Mars field. The company believes that the output from the platform would be ramped up during the current year. In addition to these three projects, there are other projects that are expected to start during the year, but are under construction and almost 75 percent completed.

Gulf of Mexico

BP is the leading acreage holder in the Gulf of Mexico. It has been engaged in a range of activities, including exploration, appraisal and development work. With ownership of more than 650 leases in the Gulf, the company is well-positioned to derive substantial opportunities for growth.

BP recently announced the start-up of a major project in the deep-water Gulf of Mexico. The Na Kika Phase 3 project came online as the first of the two new wells and started oil production. The start-up of the Na Kika Phase 3 project is the third major project for the company this year. These new project start-ups are helping a great deal in improving BP's operational outlook, even as uncertainties associated with oil spill liabilities remain.

Going forward, BP plans to concentrate future activity and investment in the Gulf and growth opportunities around its four major operated production hubs: Thunder Horse, Na Kika, Atlantis and Mad Dog. In addition to concentrating on the operated hubs, BP also plans to continue its investment in its non-operated production hubs that includes Mars, Ursa and Great White.

What Change the Separation of Onshore Business will bring

BP plans to separate its onshore U.S. oil and gas assets into a new wholly-owned business to improve the competitiveness of its shale gas portfolio. The move is expected to enhance competitiveness, as well as assist the U.S. Lower 48 onshore business to lead in innovation and development of technologies for unconventional resources.

Source: Investor Presentation

Currently, BP manages the region through its North America gas group. The new business will also be managed from the same location, but will have a separate management team and different governance, processes and systems.

The company recently completed reforming its North American gas portfolio by divesting non-core assets and focusing development in unconventional plays, such as Fayetteville, Woodford and Eagle Ford Shale. Eagle Ford has managed to deliver gross production of 500 million standard cubic feet of gas per day within four years of production.

Within the region the company has an extensive unconventional resource base of 7.6 billion barrels of oil equivalent across 5.5 million acres with more than 21000 wells.

However, there is a lot of room for the company to further improve its performance. This will require a faster decision-making process, speedy innovation and shorter cycle times. To fulfill these requirements, the company intends to change its operating model.

Exporting Crude

BP is moving to export crude oil from the U.S., and has managed to avoid violating the export ban. The oil giant has agreed to take at least 80 percent of the capacity of a new $360 million mini refinery in Houston, and this will process just enough crude to escape restriction on sale outside the country.

BP has completed the commissioning of its Whiting Refinery Modernization project. It will transform BP's U.S. fuel business, following the divestiture of the Texas City and Carson refineries last year. The project is expected to increase operating cash flows by $1 billion per annum.

BP in Alaska

BP has been operating four pipelines and 13 oilfields in the Alaskan North Slope, which includes Prudhoe Bay, Endicott, Northstar and Milne Point, and it owns major interests in six other producing fields. In 2012, the state contributed almost 139,000 barrels per day; more than the total production from Europe.

Owing to the considerable value of the region, the company aims to increase its capital expenditure in Alaska by 25 percent to $1.2 billion. This is also due to the more favorable tax rate in the state, as per the recent bill that was passed. With the increased budget, the company will now have 15 wells in its Prudhoe Bay program in 2015 and 2016. In addition to this project, the company is also considering developing Northwest Schrader to boost its production capacity by 40,000 barrels per day. Upon successful completion of 15 wells, the company could extend the program to drill about 200 wells. However, the cash flow effects of this investment will not be visible until the end of the decade.

Concluding Remarks

Although the aftermath of the oil spill in 2010 is still hurting the company, it is consistently making efforts to offset these effects by making operational progress. The company has strategically allocated its capital budget, and around 80 percent of the budget is designated to the upstream ventures. Going forward, the company also plans to spend another ~25 billion on new start-ups and turnaround ventures through 2015-2018. Moreover, the strategic separation of the U.S. Lower 48 region will allow the company to unearth the resource base of 7.6 billion barrels of oil equivalent.

BP has been able to get production from 3 major projects so far in 2014, and several projects are expected to contribute within the next couple of years. In addition, the continued divestment plans of the company will not only add value, but will also shift BP's focus on higher-growth projects. Therefore, I recommend buying the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: The Bull Case For BP Continues