BP enjoyed a stronger first quarter than nervous shareholders were prepared for, reporting earnings of $0.25 per share. BP produced 2.4 mmboe per day (pdf), only slightly lower than the first quarter a year prior. Excluding its Russian joint venture TNK-BP, BP is giving guidance (pdf) that production for 2012 will be essentially flat compared with production in 2011. The TNK-BP venture is producing modest returns (pdf), with net income up 3% over the first quarter of 2011 at $1.2 billion, and production up 4% over the first quarter of 2011 at 1.02 mmboe per day.
Divesting Assets to Focus on Its Core
BP continues to divest non-core assets, selling off assets totaling $23 billion since the beginning of 2010 (pdf). Recent deals include a $400 million sale to Perenco UK Ltd of its southern gas assets in the North Sea, a $1.2 billion sale to Linn Energy (LINE) of its natural gas assets in Kansas, and a confidential sale to Hilcorp of its assets in the Tuscaloosa Trend. BP is currently looking for a buyer (pdf) for certain of its Gulf of Mexico assets. BP CEO Bob Dudley explained that "the sale of these mature assets will allow us to concentrate our efforts on our strong core positions in the U.S. and globally."
These sales will also help BP meet its obligations for environmental cleanup and damages related to the 2010 Deepwater Horizon disaster. BP's debt load remains high, at $31.2 billion, though BP expects this to fall by up to half into 2013 as proceeds from its asset sales are realized, new projects are brought into production, and the final payments into the trust for the Macando blow out are completed. However, though BP's debt-to-equity ratio is actually better than industry average, standing at 0.3 against an average of 0.6, its obligations have negatively impacted its revenue growth, by which benchmark BP is just keeping up with its peers despite its new acquisitions and a large cash balance. Exxon Mobil (XOM) reported revenue 8.8% above the year prior in the first quarter, while Royal Dutch Shell (RDS.A) reported revenue 9% higher for the same period. BP's revenue growth for the period came in at 10%.
Acquiring New Positions, Building Current Positions in Multiple Plays
While BP is divesting certain of its holdings, it is acquiring holdings in other areas. Some of the most promising include the Utica Shale in Ohio, and offshore explorations in Namibia, and Uruguay. Its Utica Shale play brings BP into closer competition with unconventional players like Anadarko Petroleum (APC), which indicated earlier this year that it had "strong initial results" on the play, and planned to evaluate its large 390,000 acre holdings throughout 2012. Chesapeake Energy (CHK) also has a large presence on the Utica, although it would most likely sell its Utica assets upon a receipt of a reasonable offer, given its current position.
Of course, BP's true core competency (despite the Deepwater Horizon) is deepwater drilling. BP resumed operations in the Gulf of Mexico and has five operational rigs with eight more to come online by year end (pdf). Only two of the operating rigs are producing; two more are appraising, and one is continuing abandonment work. The eight set to come online may be centered in the Galapagos, where BP expects to begin production sometime in the second quarter (pdf). Additionally, BP Trinidad and Tobago, an operational unit of BP, is exploring new deep water in Trinidad and Tobago. The Trinidad and Tobago unit produces 408,000 boe per day, 12% of BP's natural gas production worldwide.
BP is also continuing to build its deepwater operations in the North Sea, recently ordering four new platform support vessels to service the area. BP North Sea Regional President Trevor Garlick reiterated that BP's North Sea position is "long term," as the company plans to spend $10 billion on its North Sea projects in the next five years.
In addition to exploring its traditional deepwater opportunities, BP is investing in nontraditional power sources. Its recent announcement of a joint venture with Sempra U.S. Gas & Power, however, might have some shareholders concerned. The project, to construct a small-scale wind farm in southeastern Maui, joins other ventures on which BP and Sempra are cooperating, including wind farms in Kansas, Pennsylvania, Indiana, and Colorado. Recent research indicates that wind farms actually increase ground warming in very short time periods in the areas where they are built, and there are still doubts over the profitability of these ventures once government funding runs out. The recent string of clean energy firm bankruptcies does little to counter this impression.
One of the best ways to understand BP's value is to look at it in direct comparison to its competitors on the value ratios. BP is trading around $38 with a price to book of 1.0 and a forward price to earnings of 4.9, which is extremely low relative to its true value. Shell is trading around $63, with a similar price to book as BP, at 1.1, though a higher forward price to earnings of 6.3. By comparison, Exxon Mobil is trading higher, around $82 with a price to book of 2.4 and a forward price to earnings of 9.1. Unconventional competitor Anadarko is trading around $64 at a price to book of 1.6 and a forward price to earnings of 12.1. Chesapeake, which remains an unconventional competitor despite its liquidity and production struggles, continues to trade low around $15 a share, giving it a price to book of 0.7 and a forward price to earnings of 7.5.
BP's resumption of activities in the Gulf of Mexico and its sale of non-core assets to focus on areas where BP can succeed show that BP will not be brought down by the Macando blowout after all. As the stock is poised to rise, its current price and value offer a good buying opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.