- A number of divestments and investments have narrowed down the focus of the company.
- The ban that was previously imposed by the US after the GoM oil spill has been lifted, giving the company exposure to the US markets yet again.
- Rising reserves replacement ratio is indicative of the fact that the company is poised for long-term growth.
- The contract with Kinder Morgan gives BP 80% ownership rights to KM's Houston-based facility and enables BP to sell within and outside the US.
The oil spill incident in the Gulf of Mexico in 2010 significantly dented BP plc. (NYSE:BP) in terms of top line growth and stock market performance. After the incident, BP took strong action regarding installation and observance of risk measures. The following discussion is intended to highlight the key changes that have taken place in the company recently, including the ban lift from the US, new investment projects, and probable future stock performance.
The US is Open for Investment Once Again
The ban that was previously imposed as a consequence of the Gulf of Mexico oil spill incident has finally been lifted by the US government. BP is required to comply with a set of rules and guidelines to ensure that no such incident happens again. Moreover, BP will have to drop the lawsuit against the Environmental Protection Agency (EPA) that was filed as a result of the EPA's ban imposition on BP. The lifting of the ban will bolster the top line of the company, giving the company exposure to the US market once again. The positive impact of the news can be seen in the rising stock price of the company.
Even though the opportunity for new contracts has opened up, there are certain complications that are worrisome. So far, BP has paid $3.81 billion of the $9.2 billion required to be paid to the victims of the Gulf of Mexico incident. BP wants the remaining payments to be delayed in order to gain some time to strengthen its competitive position in the US and implement new accounting safeguards. However, the courts have allegedly denied that request, which will make it harder for the company to attract new contracts, fight competition, and make payments to the oil spill victims all at the same time.
Divestments and Investments
BP is aggressively struggling to streamline its operations for efficient asset utilization through divesting underperforming assets and making investments in an operationally-efficient asset base. The company has let go of assets amounting to $38 billion, as reported in the company's presentation. These divestments are inclusive of the sale of stake in the Russian company TNK-BP to Rosneft for $27.5 billion, wherein cash proceeds amounted to $12 billion, while the remaining payment was share-based. Another $10 billion worth of assets are expected to be divested by the end of 2015. The proceeds of these divestments will mainly be utilized in distributions among the shareholders.
With regard to investments, organic capital expenditures amounted to $24.6 billion in 2013, while roughly the same level of capex is expected to be made this year. Beyond 2014, its capex is expected to hover around $24-$27 billion per annum up until the end of the decade.
The combined effect of these divestments and investments is a much-improved and efficient performance on the part of the company compared to the previous few years. This efficiency can be gauged to some extent from the swelling reserves replacement ratio that measures the operational efficiency of an oil and gas producing company. BP's organic reserves replacement ratio in 2013 stood at 129%, compared to just 77% in 2012; the ratio levels up to 199% from 129% if repositioning in Russia is included. The rising ratio is indicative of the fact that the company is poised for long-term growth.
With regard to the Gulf of Mexico, BP has signed an agreement with Kinder Morgan Energy Partners LP (NYSE:KMP); the terms of the contract give BP the ownership rights to 80% of the capacity of Kinder Morgan's new Houston-based refinery that will become functional in July. The lifetime of this newly-signed contract is ten years. Although small, with the ability to produce about 100,000 barrels a day, the facility is designed for further expansion. Moreover, the contract will allow BP to sell within and outside the USA.
Returns to Shareholders
The company has made it a point to pay out substantial returns to its shareholders in the form of dividends and share buybacks. Despite the blow to its top line due to the oil spill incident, the company continued to increase its dividends even after 2010. This trend is expected to be sustained into the future, since BP's operating cash flows are strengthening. The company's operations are expected to be more streamlined and the top line is expected to grow. In 2013, BP paid $5.4 billion in cash dividends to its investors. By 2014, dividends are expected to increase by 5.6%. The following chart indicates BP's dividend yield compared to two of its major competitors, Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM).
Besides dividend payments, another $5.5 billion was distributed among shareholders through share buybacks. The company has made share repurchases worth $6.8 billion to date, and an additional $8 billion-worth is expected to be distributed through the buyback program this year.
BP is a long-term buy, in my opinion. The stock is not only a great investment from the dividend perspective, but it is also poised for future growth given the lifting of the US ban and the contract with Kinder Morgan.