BP Good for $56 if it Can Boost Production

by Trefis Team
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Oil major BP (NYSE:BP) announced its Q3 results which beat analyst expectations despite a 12% drop in production over the same quarter last year. [1] The company also painted an upbeat picture of future growth prospects, estimating that it would revive production levels from the present quarter and post a 50% increase in its free cash flow 2014. [2] In another significant announcement, BP said that it would increase its divestment program to sell $45 billion worth assets to invest in opportunities with higher returns. BP’s competitors Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) have scheduled their earnings releases over the next few days.

We have a $56 price estimate for BP which is at a 20% premium over its current market price.

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BP recovering from spill

The Q3 earnings were largely seen as a recovery for BP from the U.S Gulf of Mexico event which halted its exploration activity in the region and exposed the company to billions of dollars in legal liability. However, with Anadarko agreeing to pay $4 billion to meet the costs arising due to its stake in the Macondo well and government reports also blaming sub contractors for the incident, BP’s damages from the incident seem to have lessened considerably. Recently the U.S. government also allowed BP to participate in the latest round of bidding for exploration in the GoM which should boost the company’s exploration and production business.

Elaborating on plans to boost production rates which continued to fall, CEO Bob Dudley pointed out that production levels were set to grow with the turnaround plan heading towards completion in the North Sea, Angola and the U.S. GoM. The three geographies are of special significance to BP as it generates most of its ‘higher value’ barrels there. Also, the company will be expanding its asset sale program to generate $45 billion from the earlier target of $30 billion. Proceeds from the sale are expected to help BP meet costs of the Gulf spill and invest in exploration and production projects that yield higher returns.  Analysts however remain cautious pointing out that BP is yet to obtain new drilling licenses in the U.S. GoM to enable it to go ahead with expansion plans. [3]

No plans for a spin off

Despite increasing the scope of its asset divestment program, the company ruled out plans to spin off large blocks of assets or divest its stake in TNK-BP and focus on upstream exploration. The company still remained committed to its integrated ‘big oil’ approach. [1]

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Notes:
  1. BP turns a corner after Gulf blowout, Reuters [] []
  2. Dudley Sets Out Priorities For Stronger, Safer BP, BP []
  3. BP’s Profit More Than Doubles, WSJ []
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