BP’s Stock Rises As The Company Continues To Deliver On Its Expansion Plans

by Trefis Team
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Taking the market by surprise, BP Plc. (NYSE:BP), the European integrated energy company, posted a stellar improvement in its top-line as well as earnings for the September quarter 2017, driven by higher volumes and better pricing during the quarter. Further, the oil major raised about $700 million from the initial public offering (IPO) of its newly formed midstream entity, BP Midstream Partners, which began trading under the ticker BPMP on 26th October 2017. While the new entity will manage BP’s pipeline operations going forward, the company aims to deliver on its upstream expansion plans, while restricting its capital investment over the next few years, in order to enhance its shareholder value. We have a price estimate of $41 per share for BP, which is in line with its current market price.

See Our Complete Analysis For BP Plc. Here

Below are the key takeaways from BP’s 3Q’17 earnings report:

BP’s 3Q’17 revenue rose more than 27% on a year-on-year basis to $60 billion, as opposed to the analyst expectations of $48.5 billion. This surge in revenue growth was driven by stronger-than-expected production volumes from major project start-ups, and higher oil and gas price realization in its upstream operations, and stronger refining margins for its refined products in its downstream operations. Besides, the company was able to translate the revenue improvement into a solid earnings growth as well.

Year-to-date, BP has managed to bring six out of its seven major projects online, three of which commenced operations in the third quarter. All these projects have started either on or ahead of schedule and have been within the estimated budget for the company. This indicates the company’s strong execution skills and focus on efficiently delivering on its targets. These projects are expected to add a production capacity of around 500 thousand barrels of oil equivalent per day (Mb/d) to BP’s existing capacity by 2020, which is likely to boost its top-line as well as operating profits in the next few years.

Given the continuous volatility in the commodity markets, BP has decided to stick to a capital budget of $16 billion for 2017. Also, the company will regulate the capital expenditure to $15-$17 billion over the next three to four years, depending upon the pace of recovery in commodity prices. A lower capital spend will enable the company to manage its finances well and is likely to augment its deteriorating cash flow position.

Apart from this, the annual expenses relating to the Deepwater Horizon oil spill are expected to be around $5.5 billion for the current year. However, these are likely to drop to about $2 billion by 2018 onward. This, coupled the anticipated divestment proceeds of $2-$3 billion per annum, will boost BP’s dwindling liquidity position in the next few years.

BP Midstream Partners Will Further Enhance BP’s Market Value

BP Midstream Partners, or BPMP, is a master limited partnership (MLP) formed with the aim to own, operate, develop, and acquire pipelines and other midstream assets, mostly in the US. BPMP recently began trading on the New York Stock Exchange, and has raised more than $700 million from the IPO of its common units. This influx of cash will allow the new entity to focus and expand BP’s midstream operations much more efficiently. Plus, the tax efficient structure of an MLP will enable BPMP to return most of its earnings as distributions to BP, which will in turn generate a higher value for BP’s shareholders. Below is a snapshot of BPMP’s assets and their estimated contribution in cash available for distribution in 2018.

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