Two years ago this month was when we all witnessed the Deepwater Horizon disaster and tragedy. With the death of 11 workers, over 200 million gallons of crude leaking out, tainted reputation, and $25 billion in fines and cleanup, BP (BP) is not only still surviving, but thriving today. Shortly after the disaster, the company lost billions of dollars in market cap with its share price diving 55%. At the time, it appeared that BP would never make it back and would probably file for bankruptcy. But, come back it did and the company is now back as one of the leaders in the energy sector and one I firmly to be a good investment because it is here to stay - and grow.
Like one of those clown Bop Bags that come right back up after they are hit, BP is still alive and kicking and even once again drilling in underwater canyons off Louisiana. To cover lawsuits over economic damages, medical costs, and property loses, BP estimates settlements to be around $7.8 billion, in addition to penalties up to $18 billion for violations related to the Clean Water Act. But, faded memories along with great public relations campaigns keep today's investors and shareholders looking more at oil prices than the price of cleaning up beaches. The company's stock price is up to almost normal levels and BP is back to paying dividends.
A sign of getting back to some sense of normalcy and then some is that the company in February announced it is raising its dividend from $0.08 per share in the quarter to $0.14 per share, its first hike since the company began paying one again after the big oil spill. During that time, CEO Bob Dudley took the opportunity to ensure shareholder confidence by stating, "2012 will be a year of increasing investment and milestones as we build on the foundations laid last year. As we move through 2013 and 2014, we expect financial momentum will build as we complete payments into the Gulf of Mexico Trust Fund, restore high-value production and bring new projects on stream."
Making true to those statements, BP is seeking innovative techniques to get more oil to market faster. In April, the company hired a new positioned drillship called Ensco DS-6, which can drill to a depth of 10,000 feet and can be customized to drill further at a depth up to 12,000 feet under water. When the driller has completed BP requested adjustments made to it, the company can begin using it around the end of 2012. The five-year agreement between Ensco (ESV) and BP will cost the company about $522,000 per day.
BP is staying true to drilling in the Gulf of Mexico, where it brings up about 261,000 barrels per day. Never one to back down from opportunities, BP is planning on 12 wildcat exploration wells in 2012, up from eight last year. The ambitious plays never really ended with the Deepwater disaster. Last year the company signed 55 exploration licenses in nine countries, including blocks in Angola, Australia, Brazil, Namibia (14 wells drilled) and the Gulf of Mexico, and a $7 billion venture with Reliance Industries (India). BP is doing rehab on its Rumaila field in Iraq while planning to invest $6 billion in the North Sea.
The company is slowly reviving its reputation. CEO Dudley created the new safety division after the spill, (where the director, Mark Bly, reports directly to the CEO), and safety provisions are in place before the drilling even begins. One of the new measures ensures that BP will only drill from a floating rig if it has a blowout preventer with two sets of blind shear rams and a casing shear ram that will slice and seal the pipe thus preventing the Mocondo, Gulf, and other leaks.
BP competitors include Exxon Mobil (XOM), Royal Dutch Shell (RDS.A) and Chevron (CVX). Beyond the many differences separating BP from these other super hitters is that when investors buy BP they are getting proven oil and gas reserves at the equivalent of $11 a barrel, compared with $19 a barrel when buying Royal Dutch Shell. BP trades at around five times earnings versus seven for Shell and ten for Exxon Mobil.
BP had been on a selling spree since the Deepwater disaster hoping to shed about $35 billion in assets. In October last year, BP announced intentions to expand its asset-sale program by another $15 billion before 2014. However, the collapse of its deal to sell its stake in Argentina's Pan American Energy late last year forced the company to revise its program to $38 billion. The company is shedding its non-core upstream properties while creating a portfolio with potentially stronger growth from a smaller base. BP is also divesting the Carson, California and Texas City, Texas refineries, which hold half of its U.S. capacity. The sale is expected by the first half of 2012. In March, the company arranged an asset disposal agreement with Perenco UK Ltd to sell its share in its southern gas assets in the UK North Sea. The deal is a part of BP's asset divestiture plan paying for past sins and saving for future investments. The company has retained three refineries with the greatest competitive advantage, which is expected to improve returns.
BP has generated a lot of cash, increasing operating cash flow in 2011 by 60% to $22 billion, which enabled it to grow its quarterly dividend. Sales have been good as well. The company sold oil for $101.84 per barrel in the fourth quarter (versus $78.80 in the year-earlier quarter) and natural gas for $5.07 per thousand cubic feet (versus $3.98 a year ago). Total production was 3.5 MMBoe/d, down 5% year over year. The company produces a fairly large return on equity at 25% over the past year, 17% on average over the past five years, with a limited debt-to-equity ratio of 39%. BP's shares provide investors with 4% yield and a return on equity above 25%. The company reported 4th quarter 2011 earnings of 0.536 per share, exceeding last year's 4th quarter results by 0.304, with annual 2011 earnings of 1.46 per share.
BP is a survivor and is showing its strength and perseverance with its aggressive selling of assets to cover future growth and to provide the best returns possible for investors.