Companies in the integrated oil & gas industry explore, produce, refine, and distribute oil and gas. These companies usually have worldwide operations. This industry has experienced downtime in the recent past due the low gas prices, operational inefficiencies, and higher capital spending, and all these factors discouraged industry earnings and cash flows. Nevertheless, most of the companies have altered their growth strategies to adjust along with the changing market dynamics.
They are looking to dispose of non-core assets to enhance operational efficiencies and to support their capital spending. Integrated oil and gas companies are also moving towards the production of liquid plays, which offer high margins compared to gas. They are investing in upstream activities due to the strong oil prices. In this article, I analyze BP PLC (NYSE:BP) to see how it is operating in these circumstances; I looked at its growth strategies and financial performance to predict where it is headed. Furthermore, I will compare it with its closest peer to see which one is offering better returns for investors and to see which one should be bought, held, or sold.
Where Does BP Stand?
BP has been struggling since the oil spill in the Gulf of Mexico. Furthermore, the recent downtime in the integrated oil and gas industry put pressure on the company's earnings and cash flows. The company has paid around $42 billion in charges related to the oil spill to date, and the case is still in court for settlements. Additionally, in order to combat headwinds that the entire industry is facing related to the commodity prices, the company has reshuffled its business growth strategy. Along with lowering dividend around 50%, it has disposed of numerous assets, which are not providing significant cash flows. BP has disposed of around $38 billion of assets. This year, BP continues with its divestment program, looking to divest around $10 billion in assets. This strategy not only helped to strengthen its cash flows and balance sheet, but also removed excessive burden on its operational performance.
On the other hand, BP has started several new projects both in upstream and downstream businesses. With the sale of Alaskan assets to Hilcorp for $1.25 billion, the company is focusing on enhancing production from North America's largest oil field while progressing in the Alaska LNG opportunity and enhancing Prudhoe Bay production. It is looking to complete 15 exploration wells in this year out of those eight wells that are already completed. In the first three months of this year, BP started 3 new projects: Mars B in the Gulf of Mexico, Na Kika Phase 3, and the Chirag oil project in Azerbaijan. Its Atlantis North expansion Phase 2 project also started up in the Gulf of Mexico. Furthermore, the company is looking to start three new projects in this year including the CLOV FPSO, the Kinnoull project.
In the downstream business the company continues to enhance crude processing at the Whiting Refinery and is looking to reach 280,000 barrel per day in the second quarter. It is also making portfolio adjustments in the downstream while looking to cease operations in Bulwer Island refinery in Australia. In petrochemicals, it acquired the remaining 50% interest in its PTA plant in Indonesia. Overall, the company is looking to invest around $26 billion each year until 2018 on growth projects while expecting to generate $31 billion in operating cash flows.
At the end of the recent quarter, the company seems to be on track with its new objectives and goals. It has generated strong cash flows of around $8.2 billion, capital expenditure stood at $5.8 billion, and free cash flows are at $2.3 billion. Its free cash flows turned positive after many quarters, which allowed the company to make a compelling increase in dividends. At the moment, its dividend looks safe to me as free cash flows are adequately covering dividend payments of $1.4 billion. Further, with its asset simplification and new projects I believe it will generate sufficient cash flows to cover both capital requirements and dividends.
Where Do the other Players Stand?
Due to the recent uncertainty in the integrated oil and gas industry, Exxon Mobil has suffered, and its revenues and earnings came down in the past two years. Looking at the circumstances, Exxon reduced capital investments, enhanced operational efficiencies while looking to move towards liquid plays, and increased production from existing assets. In the most recent quarter, its liquid production increased 3.3% and gas production decreased 1.2 billion cubic feet per day. The company reduced capital spending by 28% in the recent quarter, and thus, free cash flows increased significantly. As a result of these changes, it recently increased dividends by 10%. Furthermore, XOM is looking to start numerous projects this year, which will ensure production and cash flow growth. Its PNG LNG project operation started production at Damar Gas Field. The Hibernia Southern expansion in Canada will start production in this quarter, and many other projects like Banyu Urip project and Kearl expansion are nearly completed.
Chevron has also experienced headwinds in the past two years and lost considerable profits compared to past years. Its both upstream and downstream businesses are generating negative growth. In the recent quarter, its upstream earnings came down due to the volatility in crude oil prices while downstream earnings were relatively flat compared to the past year quarter. Meanwhile, its capital spending is still high. Thus, with the negative growth in earnings and high capital spending, CVX's free cash flows are negative. The company has started many growth projects, which are expected to boost production. But most of its projects are expected to start production in 2015 and 2016. Therefore, I think CVX will keep facing headwind in the coming days.
BP's management manages to stabilize the company after the oil spill. The company has been successfully shedding its low performing assets, which are enhancing both operational efficiencies and cash flows. A simplified business model will help it to attain efficiencies. However, its earnings growth has been quite stagnant over the years, and the company needs to put more efforts to grow. It should further enhance its production from existing assets from each unit while lowering the cost of production. Its cash flow projections are attractive, which ensures that the company will keep generating positive free cash flows and will pay increasing dividends. Its focus on buybacks will further help increase dividends along with enhancing earnings per share.
With many optimistic signs, BP has gained a lot of momentum in the past eight months with recent investments, dispositions, and presenting future cash flows projection of $31 billion. This provided a lot of hope to dividend investors as BP offers a very strong dividend yield. This surge in price makes BP a bit expansive over its two other peers. Nonetheless, BP still looks like a good stock to buy on dips for dividend investors as the company has potential to sustain dividend growth while offering a steady price appreciation. In addition, its recent investments particularly in upstream business will lead it to generate positive production and earnings in growth in coming years.
On the other hand, XOM and CVX are trading at attractive multiples. Both companies have recently announced a dividend increase and are setting strong footprints for future growth. XOM looks more attractive to me as it has the ability to generate massive free cash flows, and its most recent investments are likely to start production in the upcoming months. XOM demonstrated this trend when it announced a 10% increase in dividends and repurchased a large number of shares.
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.