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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 highest average price ever, BP's revenues per barrel of oil increased to $101.3. Revenues per barrel remained stable during 2012. We currently estimate that prices will dip slightly in 2013 and then rise annually by about 2-3%. 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 53% in 2010. In 2012, margins dipped to 43%. We expect margins to rise to 47% over the long term. However, with the increased difficulty in finding new sources of oil and NGL, if higher exploration costs lower margins to 35% over this period, the Trefis price estimate would see a 10% downside.
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:
Large production facilities at lower operating costs
Over the past several years, BP has built several large production facilities and has discovered oil and gas at costs lower than those of its competitors in the space. The new developments account for nearly 50% of BP’s upstream portfolio compared to 30% in 1999.
Refining is a low margin business
Declining gross margins in recent years have drastically impacted the profitability of the refining business for most oil & gas companies. Gross refining margin is the single most important metric that determines how profitable a refinery is. Refining margins are largely driven by the demand for end products which is mainly dependent on the level of economic activity. Downstream margins declined from 2.8% in 2007 to 0.61% in 2012 as a result of weak product demand and excess spare capacity. Refining margins are largely cyclical and BP has an aggressive program to divest some of its downstream assets over the next few months to focus on high returns exploration business and meet potential liabilities from the gulf spill.
Increasing costs associated with upstream/downstream activities
The costs associated with constructing new oil and gas upstream facilities have reached a new record high, according an analysis by Cambridge Energy Research Associates (CERA). According to the analysis, costs related to the extraction of oil & gas have doubled since 2005.
This has been primarily due to several reasons:
Increasing commodity prices: Prices of items such as fuel and chemicals have risen sharply in the last few years as demand grew in emerging markets. Some refineries typically use 5-7% of their feedstock as fuel to run refineries. Firms are increasing their focus on energy efficiency to drive this down
Complexity of projects: Various oil companies have embarked on different projects to extract oil such as deepwater, GTL, and oil sands. This has led to longer development timelines which have in turn resulted in higher costs.
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 a focus in recent years on increasing the complexity of refineries rather than expanding capacity. In the U.S., no new refineries have been built since 1980. However, due to improvements in process design and technology capacity has increased at 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 years, heavy crude oil is becoming more economically attractive. There has been an increasing 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.
Gulf of Mexico spill
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 litigations, 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
Trefis Forecast Rationale for BP's Natural Gas Quantity Produced
Natural Gas Production refers to the total quantity of natural gas produced by BP in a given year in terms of million cubic feet per day.
Natural gas produced has remained relatively stable during 2005-2010 largely dependent on demand globally before dropping to 6.2 million cubic feet/day in 2012. We expect growth in production to be modest going forward.
Trefis considered the following factors for its forecast.
- Improvements in technology
- A better understanding of unconventional gas resources and advances in horizontal drilling and improvements in technology have been key in increasing the size of productivity of recoverable resources.
- Increase in reserves
- Global natural gas reserves have steadily increased over the years. In 2010 global proved reserves were estimated at 10,709 million barrels of liquids and 42,700 billion cubic feet of natural gas. Advances in technology and increases in commodity prices have led to countries increasing exploration both onshore and offshore. Countries such as Brazil are becoming increasingly promising in terms of offshore activity. Similarly other countries such as Venezuela and Peru are also seeing increased interest in offshore activity.
- Natural gas is more environmentally friendly
- Natural gas is considered to be the world’s third largest source of energy after oil and hydro power. It is a cleaner source of fuel compared to other alternatives, and as such governments are encouraging the production of it over coal or oil as a source of energy generation.
- Liquefied natural gas
- Liquefied natural gas (LNG) is being recognized as an important source of fuel owing to its ease of storage and transportation. As many of the world’s natural gas plants are present in areas that are not currently connected by pipelines to customers, there will be an increase in the number of new terminals being built.
- Efficiency in drilling
- Improvements in the efficiency of drilling techniques, most notably in the production of natural gas from shale formations, has helped boost production. Shale gas has also been the primary source of the recent growth in the U.S. recoverable natural gas resources.
- Additions to pipeline
- Pipeline expansions have helped drive production increases as natural gas can be transported at greater distances and in more remote areas. In the U.S., pipeline construction activity has consistently grown because of price differentials in energy prices in the U.S.
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- BP's asset sale program
- BP has been involved in a major asset sale program since 2010 to generate cash to meet its obligations related to the Gulf of MExico spill.
- BP has been selling assets with low rates of return to improve the quality of its portfolio. This is expected to impact BP's output levels over the near term.
- Hurricane induced production outages
- The Gulf of Mexico and the Gulf Coast in general is home to a large portion of the domestic oil and gas production, processing and transportation facilities. This area is also often affected by hurricanes which impact production. Potential hurricane threats would likely reduce the supply of gas in the market.
- Economic weakness
- Shallow water operations are more likely to be affected by the economic downturn than the deep water areas, since the lease arrangements for the deep water areas are typically longer and projects take more time to develop.
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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