Long BP - New Investment Plans Make For A Robust Future

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


After months of back and forth with the Great Australian Bight project, BP finally went ahead to make a final statement about closing the books on the project.

BP has expressed its interest to scale up its investment in Argentina's Vaca Muerta Shale.

BP has shown its interest in making its entry in the Indian market by opening a total of 3,500 fuel stations in the country.

BP (NYSE:BP) has been in the news quite a bit, especially with regard to its investment plans. News of the company's plans in Australia surfaced earlier this week as BP announced it would withdraw from its position in the Great Australian Bight. Over the past few weeks, we have seen some news about BP's other investments surface as well, particularly in India and Argentina. Could these investments be better for BP? If yes, then how? This article will focus on discussing these news items and their potential impact on the company and its stock now and in the future.

Closing the Books on the Great Australian Bight Project

After months of back and forth with regard to the Great Australian Bight project, BP finally went ahead and made a final statement about closing the books on this one. The Great Australian Bight was believed to emerge as a new hydrocarbon basin in the world, subject to success in the drilling and exploration phase. The Australian Bight project, worth $1.4 billion, was likened to the Deepwater Horizon project -- one that didn't meet a very good end courtesy of the oil spill incident. The comparisons drawn to the Deepwater Horizon project raised concerns, especially from environmental activists. That said, you can imagine the pat on the back that BP received from this lot when it announced it was going to scrap the project altogether. BP's managing director for exploration and production in Australia assured the press that the decision to call off the project had little to do with environmental group pressures, and more with the inability of the project to compete for capital investment in the portfolio they already have.

The question that some might be asking at this point is whether the announcement to call off this project could have a profound impact on the company and its books. If BP had gone ahead with the project and hit the jackpot once it went into exploration, the success could have altered the company's financials for the better. However, the chances for success, even according to BP, were one in 10 -- hence not assured by any means.

I would speculate that the move away from this project had a lot to do with BP's new focus on assets that have better margins (35%) and lower development costs (20%). If this is in fact the case, which I am confident it is, then the move away from this project does BP more good than bad. This leaves BP with $1.4 billion of development funds to plug in elsewhere, where margins are guaranteed to be better and development costs are expected to be lower. In fact, diverting these funds to other projects could actually put BP in a better position in terms of free cash flow, since the project selection will be on the basis of delivering higher margins.

Alternative Investment Plans

As the chapter on the Great Australian Bight reaches its end, BP definitely has other projects on the agenda to begin focusing on.

For starters, news about the company's interest in scaling up its investment in Argentina resurfaced last month. The Vaca Muerta shale fields will be the target for assets to be bought, especially because U.S. shale prices are going through the roof. CEO Bob Dudley spoke positively about Argentina's efforts to restore the country's investment appeal, which is an assurance that we could see BP making announcements of its purchases in the country over time. Once again, these investment decisions are expected to be a reflection of the new investment strategy that BP is pursuing, and are likely to pan out nicely in the future once these investments are made and begin going live.

Following in Shell's (NYSE:RDS.A) footsteps, BP has also shown its interest in making its entrance into the Indian market by opening a total of 3,500 fuel stations in the country. Currently, the Indian market is dominated by state-owned Hindustan Petroleum Corp., but the potential for growth in the country is strong. Oil demand seems to be growing at an annualized rate of 14% each year in India, making it the third-largest oil-consuming country in the world. What's more is that the Indian economy's growth is extremely fast paced -- it's at a staggering 8% per year, which makes prospects for oil companies like BP in the country seem extremely bright. This entry into the Indian market has come at an opportune time for BP, when the Indian market is encouraging private firms to step in and encourage efficiency among state-owned companies. Furthermore, given the potential that India holds in terms of demand, I see BP's downstream business -- particularly the revenues of the downstream business -- receiving a lot of support from this move in the coming years.

Once the first set of stations are rolled out in the country, and if they happen to do well, we could see the initiative contributing to growth in BP's top and bottom lines. As more stations open up in the country -- a prediction that I strongly believe in -- BP could be making quite a bit out of India along the way. Competition is likely to follow suit in this country, and sustaining the revenue growth in the future will largely depend on how BP responds to competition that follows its trail into India.

BP's Financials and the Stock Performance

BP's second-quarter results came in on July 26, 2016. The key takeaways were an approximate increase of 18% in the company's revenues, up from $39 billion in Q1 2016 to $46.4 billion in Q2 2016. In terms of profitability, the company seems to be doing better than it previously did, although its bottom lines remained in the red. The company's losses clocked in at 1.4 billion in Q2 2016, which is a much better figure compared to the $5.8 billion loss it posted in the same period last year.

BP's stock performance has been fairly strong as well, as prices have risen by close to 14% in the past six months. Its 52-week price ranges between $27.01 and $37.53 per share. The stock currently trades at a threshold of a little over $35 and offers a yield of close to 7% for investors.

My Thoughts on BP

I've mentioned some top developments related to BP in this article, some of which I feel could be important for the future of the company. Of course, as with any oil and gas company, stock prices are driven by the prices of oil in the market -- but I choose not to ignore the other facts that could keep the stock going.

All the new project announcements that are coming along have two things in common -- better margins and lower development costs. While BP might feel the pinch of the investment right now, the future could be quite comfortable for the company if it sticks to its plan. Not that BP is in a tight spot at the moment, but I'm looking at the better margins as a robust source of free cash flows for BP in the future. This could translate very well for BP as it could allow the company to sustain its dividend for shareholders -- if not increase dividends altogether.

Moving to the cost side, BP has done remarkably well when it comes to controlling its costs. It has undoubtedly been aggressive in its strategies that have allowed it to reduce its production cost per barrel of oil, now making it the only producer to produce oil at the lowest cost in the industry at nearly $8 per barrel. Cash costs are another area of focus for BP, where the company has expressed its interest in reducing these by about 30% over the next year. Keeping these cost reductions in mind, I see these efforts translating into an improvement in BP's bottom lines over the next couple of years.

As CEO Dudley speaks of oil prices varying between the $55 and $70 per barrel range for the rest of the decade, I think the plans that BP is currently investing in could lift up the company's financials in the future -- even at the predicted price levels for oil. In fact, I think that the new investment plans could allow BP to remain profitable even if oil prices are slightly below the numbers Dudley has predicted. That said, the new investment policy for BP gives me a sense of security that the company is preparing well for a future in which oil prices might not bounce back to their former high levels.

The scrapping of plans in Australia might have disappointed some who hoped for some amazing discoveries in the region, but I'd say that BP has some more lucrative investment plans in place. The performance in the Indian market, and its ability to grasp more investment in Argentina, could bode well for the company in the future. As I see it, the investment strategy (particularly in emerging markets) could see itself on its feet, carrying the company forward in the next decade or so. These investments right now could put the company in a bit of an uncomfortable position, but these pains are, in my opinion, only short term.

For shareholders who seek a source of income from dividends, I would say that BP has the potential to maintain a good dividend now and even in the future. If dividends weren't scrapped when oil prices went down to nearly $30 a barrel, I don't foresee dividends being scrapped in the future either. Another reason behind this confidence is my expectation of the free cash flow that BP could draw in from its projects coming online, which would subsequently support higher payouts to shareholders.

I believe that BP could be a stock for a long-term investment, especially at these levels. Buying on a dip would be highly recommended.

Disclosure: I/we 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.