For investors considering broadly-diversified international oil companies moving directionally toward alternate energy and low-carbon (natural gas) production, BP (BP) may be of interest.
The company pays a 6.7% dividend and has spent the past year integrating its $10.5 billion U.S. shale play acquisition into its extant U.S. operations.
This article focuses on BP’s Lower 48 operations, the BPX Energy division, as a U.S. shale competitor and as emblematic growth for the overall company. An international major, BP has substantial other operations in the U.S. offshore and downstream, in Europe, in Russia, and other international projects.
Brief Company Profile
BP is headquartered in London, United Kingdom and has 69,600 full-time employees worldwide. The company's U.S. operations are based mainly in Houston. BP operates three segments: upstream, downstream, and Rosneft (a Russian joint venture). The upstream segment focuses on oil and natural gas development, transportation and marketing. The downstream segment focuses on hydrocarbon refining and marketing. The Rosneft segment explores in Russia, operates refineries there, and markets fuel.
BP’s U.S. operational history was marred by the 2010 Macondo tragedy, in which eleven men were killed drilling a BP offshore Gulf of Mexico well. Safety, legal, financial, and cultural issues have necessarily occupied the company since.
At the end of 2018, BP reported proved reserves for both subsidiaries and equity-accounted entities of 10.7 billion barrels of oil (55%), 744 million barrels of natural gas liquids (3%), and 49.2 trillion cubic feet of natural gas (42%), for a total of 19.6 billion barrels of oil equivalent (BOE).
Of this, BPX Energy’s reserves were 423 million barrels of oil, 382 million barrels of natural gas liquids, and 9.5 trillion cubic feet of natural gas.
Left axis, $/Bbl, WTI oil price, credit: Macrotrends.net
Left axis, $/MMBTU, Henry Hub natural gas, credit: Macrotrends.net
Oil and Gas Prices
The October 7th, 2019 Brent oil price was $58.44/barrel. The West Texas Intermediate (WTI) oil price at Cushing, Oklahoma was $52.95/barrel and the natural gas price at Henry Hub, Louisiana was $2.29/million British Thermal Units (MMBTU).
At pipeline-standard specifications, the volume of one thousand cubic feet (one mcf) of natural gas contains a heat content of one million BTUs.
Second Quarter 2019 Results for BPX Energy
In the second quarter of 2019, BPX Energy—the U.S. lower 48—produced 500,000 BOE/day of which a quarter was oil, condensate, and natural gas liquids and three-quarters was natural gas. (Total second quarter 2019 BP production was 3.8 million BOE/D.)
The BPX Energy division’s average liquids realization was $38.89/barrel and its natural gas realization was $1.79/mcf, yielding an overall realization of $17.24/BOE. This compares favorably to production costs of $7.37/BOE.
BPX Energy Reserves
Investors are asked to recall that BOEs are not the same as barrels of oil. The equivalence is based on volume for condensate and natural gas liquids, and on heating value equivalence for natural gas. The volumetric prices for all three are lower than for oil. For example at a 6:1 heating value equivalence, 60,000 BOE/D of Haynesville gas translates to 360,000 MMBTU/day. So rather than $3.0 million/day if the 60,000 BOE/day were 100% oil at $50/barrel, the revenue from this Haynesville gas would be $720,000/day for 360,000 MMBTU/day of gas at $2.00/MMBTU.
In the chart below, I have used a 6:1 equivalence. BP uses a 5.8:1 equivalence. Both are industry standards. The BPX Energy division’s developed reserves at December 31, 2018 were 1.04 billion barrels of oil equivalent, mostly natural gas. Similarly, its total developed and undeveloped net proved reserves at December 31, 2018 were 2.39 billion barrels of oil equivalent, again mostly natural gas.
Again, please note, these are only the BPX Energy/US Lower 48 figures—BP’s total reserve profile is the eight-times-larger 19.6 billion BOE of net proved reserves described above in the company profile.
In the second quarter of 2019, BPX operated four rigs in the Haynesville (gas-prone) shale, six in the Eagle Ford, and three in the Permian.
Eagle Ford and Haynesville Competitors
BP’s competitors in the Eagle Ford and the Haynesville fields include Callon (CPE), in its acquisition of Carrizo (CRZO), Chesapeake (CHK), ConocoPhillips (COP), ExxonMobil (XOM), Marathon Oil (MRO), and several smaller companies. The challenge of operating profitably in the various "windows" of the Eagle Ford coupled with oil and gas price volatility was recently proven again when one company, EP Energy, declared bankruptcy thus joining already-bankrupt Sanchez Energy.
Permian competitors are legion—at least thirty public companies and many private companies--and they compete for talent, sand, gas and oil pipeline space, trucking, housing, oil field services, and every other component of oil production. BP’s Permian competitors include several of those listed above, as well as Chevron (CVX), Parsley Energy (PE), Apache (APA), Occidental (OXY), and WPX Energy (WPX).
Globally, Shell (RDS.A) is also a significant competitor.
The Macondo Settlement
The Macondo tragedy, an offshore explosion on a BP well in which 11 people lost their lives and another 17 were injured, occurred nine years ago, in 2010. However, it was preceded by accidents at other BP facilities, including the 2005 Texas City refinery explosion in which fifteen workers were killed and another 180 injured. BP no longer owns this refinery; it was acquired and upgraded by Marathon Petroleum (MPC).
BP settled over Macondo with the U.S. government in 2015 for $20 billion. Total clean-up and settlement costs have been more than $65 billion. In 2019 the company's Macondo spill payment is expected to be about $2 billion.
As part of the recovery and structural change, BP’s CEO Bob Dudley is well on the way to completing a massive divestment plan with projected total asset sales of $75 billion.
At October 4, 2019, Institutional Shareholder Services ranked BP’s overall governance as a 2, with sub-scores of Audit (1), Board (1), Shareholder Rights (10), and Compensation (1).
Insiders own a negligible (0.03%) fraction of the stock.
The number of shares shorted as a percentage of shares outstanding is also negligible, at 0.19%.
Reading tea leaves, the retirement of low-key Bob Dudley as CEO—who gets considerable credit for steering BP through its post-Macondo recovery—and elevation of upstream chief Bernard Looney suggest BP continues to view upstream operations as critical. Future goals are expected to center on technology, cash returns to investors, low-carbon energy, and investing in new energy sources. However, Looney’s upstream background also indicates the profitability of new projects will be compared to BP’s experience in oil and gas drilling.
BPX Strategy and Capital Expenditures
Post-divestment, BP’s $10.5 billion acquisition of BHP’s U.S. properties was the clearest signal yet of a new path forward.
These assets are primarily natural gas (76% of current production, about two-thirds of total BPX reserves), so they are a fit with the company's lower-carbon emphasis. The preponderance of natural gas also suggests the likelihood that international major BP, will supply to and sell from the new U.S. Gulf Coast liquefied natural gas export plants.
Capital expenditures for the BPX Energy division in 2019 were $549 million in the second quarter and $978 million for the first half-year. Clearly, unlike some of its competitors, BPX Energy is not cash-starved.
A Note on Taxes of Foreign Dividends
Investors should be aware that the UK offers a favorable foreign dividend withholding rate of 0% (although 20% for real estate investment trusts). This compares well to other developed and European countries, a few of which are shown below:
*Canada 25% (15% for Americans)
*Netherlands 15% (falling to 0% starting in 2020)
BP’s Financial and Stock Highlights
BP’s market capitalization is $125.5 billion at an October 7, 2019 stock closing price of $36.95 per share.
Its most recently reported EBITDA (earnings before interest, taxes, depreciation, and amortization) was $33.25 billion. With an enterprise value (EV) of $184 billion, the EV/EBITDA ratio is a very investor-attractive 5.5, far below the preferred ratio of 10 or less.
BP’s 52-week price range is $35.73-$46.23 per share, so its October 7th, 2019 closing priceof $36.95 is 80% of its one-year high. The company’s one-year target price is $50.15 per share, putting its October 7th price at 74% of that level. Another perspective: its current price gives a potential 36% upside to its one-year target price.
At a twelve-month trailing earnings per share (EPS) of $2.63, the company’s price/earnings ((P/E)) ratio is 14; the average of analysts’ 2019 EPS estimates is $3.18 and the average for 2020 is $3.82, for a forward P/E of 9.7.
Trailing twelve-months’ return on assets was 3.7% and return on equity was 8.8%.
For the second quarter of 2019, the profit for the period attributable to BP shareholders—nearest the GAAP measure of net income—was $1.8 billion, about $1.0 billion lower than the same measure in the second quarter of 2018, due in part to a difference of a $1.3 billion inventory gain in the second quarter of 2018 that did not occur in the second quarter of 2019.
Similarly, the same measure for the first half of the year was $4.8 billion in 2019 compared with $5.3 billion in 2018.
At June 30, 2019, BP had $189.5 billion in liabilities and $293.2 billion in assets giving a liability-to-asset ratio of 65%.
BP’s dividend is attractive: $2.46/share represents a 6.7% yield to its October 7, 2019 closing price of $36.95/share. During the first half of 2019, the company bought back 17 million shares and expects to continue repurchasing shares through the end of 2019.
Overall, the company’s mean analyst rating is a 2.4, or between “buy” and “hold” from the ten analysts who follow it. In the third quarter, one analyst downgraded the stock, one upgraded, and one initiated.
At June 29, 2019, the five largest U.S. institutional holders of BP’s stock, some of which represent index fund investments that match the overall market, were Fidelity/FMR, State Street, Barrow Hanley Mewhinney & Strauss, T. Rowe Price Associates, and Dimensional Fund Advisors.
The company’s beta is 0.62, representing less volatility than the overall market and in line with its large size and diversification across countries and energy sectors.
A Note on Valuation
The company’s book value per share of $30.13 is less than its market price, a positive indicator.
Positive and Negative Risks
Potential investors should consider their oil and gas price expectations as the factors most likely to affect BP.
Despite the terminology of barrels of oil equivalent, investors should realize that BPX Energy's reserves comprise primarily lower-valued natural gas, natural gas liquids, and condensate. This is particularly true of the Haynesville production, which is all natural gas, and the Eagle Ford production, which has a predominance of condensate (very light oil), and natural gas liquids.
Recommendations for BP
Because this article has focused on BPX Energy--BP’s U.S. Lower 48 operations--some investors may want to look further into the full scope of BP’s operations.
Nonetheless, with its BPX Energy business emblematic of the whole and a turnaround in BP's company culture from that of a decade earlier, I recommend those interested in the natural gas side of U.S. energy consider investing in BP for its low-carbon strategy, its U.S. shale growth potential, its favorable EV/EBITDA ratio, and its 6.7% dividend yield. Different from companies headquartered in other countries, U.S. investors are not subject to foreign-country withholding on these dividends.
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Disclosure: I am/we are long BP, CPE, CVX, PE, WPX. 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.