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Investment Overview for BP (NYSE:BP)
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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 48% 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.
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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).
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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.
Low costs
The upstream divisions of most oil companies tend to be more profitable as a result of lower costs of supply (exploration expenditure, production costs and depreciation). In 2009, BP’s average costs of supply averaged around $16.66 per barrel.
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.
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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:
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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
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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.
Peak oil
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
BP and Transocean were named the responsible parties for the oil spill and named responsible for the clean up as well as compensating those parties who have been impacted by the spill. The Oil Spill Liability Trust Fund (OSLTF) established by the US government is responsible for the collection of federal costs that were incurred during the cleanup efforts under the Federal Water Pollution Control Act, and to compensate claims for oil removal costs and certain damages caused by oil pollution as authorized by the Oil Pollution Act.
BP has reached a $7 billion settlement with third party businesses and individuals and is reportedly pursuing talks with the U.S. federal authorities to settle charges against it for a total payment of around $15 billion.
In recent developments, BP has managed to reach a settlement with its equity partners including Anadarko Corp in the Macondo well. BP agreed to drop all claims against the partners in exchange for cash payments. BP also settled its case against Cameroon International which provided the blowout preventer for the Macondo well. BP's sub-contractors Halliburton and Transocean have also booked costs related to the spill.
For more information on our estimates of costs please refer to the Oil Spill Expenses section
Trefis Forecast Rationale for Crude Oil Price Per Barrel
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${forecast} refers to the average realized price per barrel of crude oil that BP generates revenue on.
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Average price per barrel realized for crude oil $48 in 2005 to $89.1 in 200 on the back of strong demand from emerging economies such as India and China and concerns about Iranian missile threats. Prices dropped significantly in 2009 to $53.5 per barrel as a result of the economic recession which led to a significant drop in demand, before recovering to $73.2 per barrel in 2010
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Trefis considered the following factors for its forecast
- Impact of Backwardation
- Backwardation is a concept when the near month’s futures contract is price higher than the same crude oil delivered months further into the future. The impact of this is to make acquisition of inventories in the present more expensive than in the future. This is the reason why oil inventories are kept low.
- The low inventory position acts as a factor to keep prices high as low inventories are taken as a sign of tight supply in the markets.
- Increased demand
- The soaring demand for distillate fuels, such as diesel, jet fuels and kerosene and played a key role in lifting crude oil prices. Studies have indicated that doubling of per capita income more than doubles per capita oil consumption.
- China's per capital GDP rose from $1,103 in 1990 to $4,088 in 2005 and India’s went from $1,202 to $2,222 during the same period
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OPEC’s influence on prices
- OPEC member countries produce nearly 42% of the world’s crude oil and control over 80% of the world’s oil reserves. Amongst all the oil producing nations only OPEC countries have significant spare oil production.
- As supply/demand fundamentals drive oil prices, it can be seen that OPEC has significant influence over global oil prices. Many of these major oil economies require oil prices of at least $50-60 a barrel and OPEC has seemed okay with prices in the $70-80 range
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Rising technology costs impacting prices
- One of the reasons for the increase in prices per barrel of oil has been the cost of enhanced petroleum recovery methods. These recovery systems include: floods of the oil bearing formations and new drilling methods. Such costs will likely keep oil prices high in the future.
Back to Company OverviewHow 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.
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