Following the Deepwater Horizon incident, the offshore sector of the oil and gas industry suffered as a whole. Recovery has not been easy for the industry, as control over the industry tightens. Government authorities are ever more zealous in an attempt to stop environmental disaster from happening. Activities were brought to a sudden halt around the Gulf of Mexico, and BP (NYSE:BP)’s stock lost half its value in less than two months.
Management now battles a war on two fronts, legal and economic. In the legal front the company is considering its appellate options concerning the decision by the U.S. Court of Appeals for the Fifth Circuit, denying the company’s request for a permanent injunction preventing certain payments under the Economic and Property Damages Settlement. On the economic side, the firm continued the programme of renewal we began following the crisis of 2010. Most importantly, shareholders’ expectations are shifting and gurus have acquired the stock during 2013.
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- BP 15-Year Financial Data
- The intrinsic value of BP
- Peter Lynch Chart of BP
Restructuring and Returning to Business
The most recent news concerning BP, closure of the Bulwer Island Refinery by 2015, is not the happiest since it will leave up to 380 individuals without a job. Andy Holmes, president of BP Australasia, blamed the increasing pressure from market rival upon the operation as the main reason for the decision.
During 2013, BP saw the stabilization and improvement of several key performance indicators. Among the most important are replacement cost profit, operating cash flow, net debt ratio, refining availability, shareholder return, reserve replacement ratio and major project delivery. However, total production continues on a declining trend at a 3% lower than 2012 due to mainly due to the effect divestments in upstream operations.
Important changes continue to be seen in the Asian region for BP. To the appointment of a new head of the Russian business, Bob Dudley, the company announce the awarding of new contracts or the development of the Shah Deniz Stage 2 and South Caucasus Pipeline Expansion projects. Also, at the end of February the firm completed the purchase of all interests previously held by Japan’s Mitsui Chemicals (4183) and Mitsui & Co. (8031) in PT Amoco Mitsui PTA Indonesia.
The biggest challenge BP confronts is the settlement of the Deepwater Horizon incident. While the economic side of the issue remains contested, the company has entered into an administrative agreement with the United States Environmental Protection Agency, to resolve all matters related to the suspension, debarment and statutory disqualification. Now, the firm is eligible to enter into new contracts with the U.S. government, including new deepwater leases in the Gulf of Mexico.
Returning to Normal While Looking for Profits
Before reaching an agreement with the EPA, BP separated the U.S. Lower 48 onshore oil and gas business. According to BP Upstream Chief Executive Lamar McKay, the decision responds to a will for reshaping the way in which business is done. At the same time, it is a deliberate effort to shield other operations from the consequences of the Deepwater Horizon incident. The new sector will be led by a separate team housed at a new location in Houston, apart from BP's Westlake campus.
BP lost no time, and even before reaching an agreement with the EPA, announced the start-up of Na Kika Phase 3, a project supporting BP’s strategy of growing high-margin production at four BP-operated hubs in the deepwater Gulf of Mexico. Also, the installation of a ninth offshore platform in Azerbaijan, and an eighth in the Azeri-Chirag-Gunashli field, are important additions to improve overall production. But the most important capital operation, because of the cash liberated for other projects, is the sale of its investment in TNK-BP in exchange for $11.8 billion in cash and an 18.5% stake in Rosneft (ROSN).
The greatest upside to BP is the offloading of non-core upstream properties to create a portfolio with greater growth potential, part of which will be unleashed during 2014 through the drilling of 15 to 20 explorations wells. Activities are already under way, and are mainly focused on deepwater in the Gulf of Mexico where the company holds over 650 leases.
Currently trading at 6.6 times its trailing earnings, BP carries a 44% discount to the industry average. It is paying $0.57 quarterly dividends, representing a 4.58% annual yield. With a portfolio restructuring, legal issues coming to an end, and production on the rise, the company has turned into an interesting long-term investment. Hence, it comes as no surprise that James Barrow (Trades, Portfolio) has not stopped increasing his position in the firm.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.