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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 $15 billion.
In recent developments, BP has managed to reach a settlement with its equity partners including Anadarko Corp in the Macondo well. BP agreed to drop all claims against the partners in exchange for cash payments. BP also settled its case against Cameroon International which provided the blowout preventer for the Macondo well. BP's sub-contractors Halliburton and Transocean have also booked costs related to the spill.
For more information on our estimates of costs please refer to the Oil Spill Expenses section
Trefis Forecast Rationale for Crude Oil & Natural Gas Liquids Produced
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${forecast} refers to the quantity of liquids produced by BP subsidiaries in terms of barrels per day.
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Total liquids produced decreased from 1.42 million barrels per day in 2005 to 1.26 million in 2008 before increasing to 1.4 million in 2009. This increase was mainly attributable to the firm's efforts to grow production at the Thunder Horse well in the Gulf of Mexico. In addition BP also started the Tangguh LNG project in Indonesia which helped increase the LNG production. But the loss due to the Gulf of Mexico oil spill resulted in the number falling to 992,000 in 2011 and 896,000 in 2012. We expect crude oil and NGL production to remain at similar levels going forward.
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Trefis considered the following factors for its forecast.
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- Major projects starting in different countries
- In 2012, BP expects to drill 12 exploration wells, start up six major projects, and increase its activity in the Gulf of Mexico to eight operational rigs.
- Major oil project start-ups this year include the Galapagos in the Gulf of Mexico, Clochas-Mavacola in Angola, and Devenick in the North Sea. A number of project start-ups are in the pipeline for the rest of 2012 and 2013.
- Like other US majors, Chevron is making a number of acquisitions to increase its acreage rich US shale reserves such as the Marcellus and Utica.
- Discovery of oil reserves
- As of 2011, global proven oil reserves stood at 1652.6 billion barrels, compared to 1267.4 billion barrels in 2001, which represents an increase of over 30%. As major oil companies discover more oil reserves both onshore and offshore, oil production is expected to continue its upward trend.
- Advances in extraction technology
- Improvements in specialized technologies such as Arctic technology, deep water drilling and production systems, heavy oil and oil sands recovery processes, unconventional gas and oil production and LNG have improved the company's extraction capabilities in previously inaccessible regions such as the Arctic, and has also provided access to previously undeveloped reserves among existing assets.
- Higher price of oil
- The increase in oil prices in 2010 and 2011 should help companies generate resources to finance exploration and production projects in deep water and other costly resources. EIA's report, the Annual Energy Outlook for 2012, forecasted a continued increase in oil prices going forward. This should support an increase in production in the long term.
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- Asset disposals to fund oil spill liability
- BP has been forced to sell several of its assets in order to pay off expenses related to the 2010 Gulf of Mexico oil spill. Proved reserves of consolidated subsidiaries at the end of 2011 stood at 11.4 billion barrels of oil equivalent (boe) compared to 12.6 billion boe at the end of 2009.
- BP has sold a number of assets in 2012 as well, including interests in a number of oil and gas fields in the Gulf of Mexico. Overall, excluding the sale of its stake in TNK-BP, the company is estimated to have made divestments totaling more than $35 billion since the beginning of 2010.
- Although part of the proceeds from asset sales could go towards the purchase of more strategic and productive assets, the bulk of the income has gone towards paying off expenses related to the 2010 Gulf of Mexico disaster. As a result, we can expect production to remain at lower levels going forward.
- Economic uncertainty
- A decline in consumer disposable income and slower investment spending is likely to weigh on oil production. According to data collected by the EIA, US proved reserves have declined by 10% over the 5 year period 2004-2008. During the same time, the reserve base in federal offshore areas has declined by about 17% during the same period.
- Costs of production
- Oil production involves heavy upfront costs associated with exploring and developing oil fields. This is in addition to the lifting costs incurred.
- While technological improvements have made things easier and oil discoveries cheaper, costs nonetheless have been going up sharply in the recent years.
- According to the US Energy Information Administration (EIA) data, average finding costs worldwide were $11.38/boe between 2003-2005. This figure rose to $18.31/boe between 2007-2009. In many cases the costs of production become so great that it does not make sense to proceed with oil field developments and thus impact total oil production globally.
- OPEC’s involvement
- OPEC seeks to create more favorable oil prices for its members by assigning production quotas to its member nations with the aim of limiting the supply of crude oil in the market.
- 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.
- Environmental impact
- The US transportation sector accounts for 33% of the total carbon dioxide emissions. The remaining two thirds are attributable to industries and to industrial and commercial buildings.
- In 2011, the US consumed approximately 134 billion barrels of gasoline. This was 6% lower than the 2007 record high of 142.4 billion barrels.
- Vehicles which run on alternative fuels such as CNG (compressed natural gas), ethanol, hydrogen fuel and electricity, while growing rapidly, still account for a small percentage of the total. However, there is expected to be a larger shift towards alternative fuel vehicles in the long term, as consumers and countries look to reduce emissions and their exposure to oil price volatility.
- Geopolitical tensions / terrorism
- Over 50% of the world’s oil reserves are currently in the Middle East. In recent history, the region has faced a lot of geopolitical instability and terrorism.
- Oil pipelines are commonly targeted by terrorists. Any related uncertainty is likely to impact oil production.
- Political upheavals in 2011 have also contributed to price instability. Libya for instance is estimated to have approximately 47 billion barrels worth of proven oil reserves. According to a Deloitte report, before the revolutions, the country was producing approximately 1.66 million barrels per day. As of the first quarter of 2012 this figure had dropped to 800,000 barrels per day.
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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