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Investment Overview for BP (NYSE:BP)
Below are key drivers of BP's value that present opportunities for upside or downside to the current Trefis price estimate for BP:
Oil and Natural Gas Liquid (NGL) Production
- Price of Crude Oil & Natural Gas Liquids: The average liquid sales price increased from $48.6 in 2005 to $89.8 in 2008 before declining to $56.3 in 2009 during the economic downturn. The global economy recovered in 2010 pushing prices to $73.4 for the year. In 2011, Brent traded above $100 for a majority of the year and oil benchmarks recorded the annual average selling price for liquids. BP's revenues per barrel of oil increased to $101.3. Revenues per barrel remained stable during 2012 and declined slightly to $99 per barrel in 2013 in correlation with global crude oil prices. We currently estimate that BP's liquids price realization would grow at around 2-3% annually in the long run. But if increasing demand for energy from developing countries drives prices up by 6% annually in the years to come, this would represent a 10% upside to the Trefis price estimate
- Oil and NGL Production Operating Margins: EBITDA margins have increased over the past few years, rising from 39% in 2005 to 51% in 2010. Since then margins have declined to around 41% in 2013. This has been primarily due to higher per unit costs while average price realizations remained relatively flat. However, since 2012, BP has recently been focussing on improving margins by starting and ramping up production from several high-margin projects. The company's 2013 margin did see some improvement as a result of this strategy. Going forward, we expect BP's upstream margins to improve to around 51% in the long run. If costs increase much faster than we estimate and margins remain relatively flat in the long run, there could be around 10% downside to our price estimate for the company.
For additional details, select a driver above or select a division from the interactive Trefis split for BP at the top of the page.
BP is one of the world’s leading oil & gas companies with operations in more than 80 countries, providing customers with fuel for transportation, energy for heat and light, retail services and petrochemical products for everyday items.
As a global player, BP's operations and activities are held or operated through a variety of structures including subsidiaries, jointly controlled entities or associates established which are subject to the legal systems of many different jurisdictions. The company's operations cover two main business segments: Exploration & Production (or Upstream) and Refining & Marketing (Downstream). BP also has some presence in the alternative energy space through its activities in biofuels, wind, solar, and hydrogen power and carbon capture and storage (CCS).
Exploration and production is the most valuable division for the firm for the following reasons:
New projects to drive higher profitability
BP started production from as many as five new projects in 2012 alone. Having started 3 more last year, the company plans to bring another 6 new projects online by the end of this year. These new project start-ups are not only expected to boost its upstream production rate but also operating margins. The company expects cash operating margin from these projects to be twice as much of its average upstream margin in 2011.
Improving downstream margins
BP's downstream margins have declined from around 2.7% in 2009 to just 1.5% in 2013. This has been more of an industry-wide trend because of overcapacity. Going forward, we expect global refining margins to continue to remain under pressure in the short to medium term due to industry overcapacity, which stems from the fact that governments in different parts of the world are willing to run uncompetitive crude refineries at very low or no returns to sustain employment and reduce their reliance on imported fuels. However, BP has been investing in upgrading its refineries to reap better margins. It recently completed the modernization of its Whiting refinery at a cost of over $4 billion. This project alone is expected to generate incremental cash flows of ~$1 billion annually for the company. Apart from the modernization of the Whiting refinery, BP’s downstream profitability will also improve with upgrades at its Cherry Point refinery in Washington and Toledo refinery in Ohio. We therefore, believe that BP's downstream margins would improve to around 2% in the short to medium term.
Increasing costs associated with upstream activities
BP's upstream capital expenditure has not increased over the past 3-4 years since it has been focusing on settling liabilities associated with the 2010 Deepwater horizon incident. However, the oil and gas industry as a whole has witnessed a surge in development costs. For example, Exxon’s capital expenditures have soared from around $18 billion in 2005 to over $42 billion in 2013, while its total hydrocarbon production has remained relatively flat over the last decade. This is a clear indication of how difficult the oil drilling business has become over the years. This has been primarily due increasing complexity of upstream projects. Various oil companies have embarked on different projects to extract oil such as deepwater, GTL, oil sands, etc. This has led to longer development timelines which have in turn resulted in higher costs. BP expects to spend around $24-26 billion on leasing rigs, floating oil platforms, installing pipelines and repairing oil-refineries over the next few years.
It is estimated that a large part of the world's oil reserves have already been discovered. Recent statistics have indicated that global consumption has been outpacing reserve additions. Peak oil is a commonly used term to describe the point at which world oil output will reach a maximum and decline afterward.
However, many institutions such as the International Energy Agency (IEA) believe that peak oil will not occur for another 25 years at the very least. Many governments across the world are promoting alternative energy measures to ensure that the supply and demand of energy will be met at all times to come.
Improvements in technology
Due to limited underlying growth in product demand, there has been an increase in recent years towards increasing the complexity of refineries rather than expanding capacity. In the US, no new refineries have been built since 1980 however improvements in process design and technology has seen capacity increase around 1% per year.
The early refineries that were established were mainly used to process light sweet crude resulting in an increase in demand for light sweet crudes. As a result of higher oil prices in recent times, heavy crude oil is becoming more economically attractive. In addition, the interest in the development of new cost effective methods for extracting and transporting heavy crude oil for refining into valuable light and middle distillate fuels is also increasing.
Uncertainties associated with the 2010 Deepwater Horizon Incident
On April 20th, 2010 an explosion occurred on the Deepwater Horizon offshore oil platform killing 11 workers and causing the largest marine oil spill in history. The first initial attempt to stop the leak occurred on May 7th in the form of a containment dome which was placed over the well. This proved to be unsuccessful along with the “top kill” maneuver that was attempted on May 26th to plug the leaking well. On July 12th, BP installed a cap to seal the oil well and prevent more leakage and on the 15th of the same month, BP announced that the tests had determined that the oil leak had been successfully sealed. It is estimated that nearly 4.9 million barrels of oil were spilled during this disaster and impacted nearly 75,000 square kilometers
Since the 2010 Deepwater Horizon incident, BP has incurred costs and provisioned as much as $42.2 billion for the various charges and claims arising from the incident. This includes the $20 billion contribution to the Deepwater Horizon Oil Spill Trust fund, which was set up by the company in agreement with the U.S. government to pay individual and business claims, penalties resulting from litigation judgments and settlement of litigation's, state and local response costs and claims, as well as natural resource damages and related costs. However, there are huge uncertainties associated with the amount of future liabilities that the company might have to bear, which can potentially turn out to be far more than what it has currently provisioned for.
BP’s oil spill expenses have swelled since it signed an uncapped agreement to compensate individuals and businesses for economic losses caused by the 2010 Deepwater Horizon incident. The company initially estimated the cost of settling a substantial majority of legitimate individual and business claims arising from the incident at $7.8 billion, and entered into an agreement with the Plaintiffs’ Steering Committee (PSC) for the same on March 3, 2012. However, along with the second quarter earning results, BP announced that it has increased the charge for the settlement to $9.6 billion to reflect higher costs of claims and litigation with no guidance on future liabilities that can arise from similar claims under the agreement.
BP also managed to reach a settlement with its equity partners including Anadarko Corp in the Macondo well. BP agreed to drop all claims against the partners in exchange for cash payments. BP also settled its case against Cameroon International which provided the blowout preventer for the Macondo well. BP's sub-contractors Halliburton and Transocean have also booked costs related to the spill.
For more information on our estimates of costs please refer to the Oil Spill Expenses section
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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