Strong Execution And Improving Commodity Prices To Drive BP’s Value Going Forward

by Trefis Team
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BP Plc. (NYSE:BP) posted a strong improvement in its September quarter performance backed by a notable improvement in its price realization and refining margins. The European integrated energy company is expected to post a notable improvement in its revenue as well as earnings due to the rebound in commodity prices. Further, the company has successfully commenced several major upstream projects under budget and on or ahead of schedule, which augmented its production growth. In addition, the company’s recent acquisition of BHP’s US onshore assets is expected to provide access to high quality assets in the Permian-Delaware, Eagle Ford, and Haynesville basins. Since these are low cost-high margin unconventional plays, this deal is likely to be accretive to the company’s earnings and cash flow and drive its value in the coming years.

We currently have a price estimate of $46 per share for BP, which is higher than its market price. View our interactive dashboard – BP’s Price Estimate – and modify the key drivers to visualize the impact on the company’s valuation.

Key Highlights of 3Q’18 Results

  • BP’s upstream revenue rose to $14.8 billion, 35% higher compared to the same quarter of last year. This growth was driven by improved price realizations and higher production during the quarter. The company’s upstream operating earnings increased to $3.2 billion, as opposed $1.9 billion in the year ago quarter.
  • BP’s Downstream operating profit stood at $1.8 billion driven by high refining and petrochemical availability and retail performance. Further, the operating profits from Rosneft rose sharply to $247 million during the quarter. As a result, the company’s 3Q’18 profit quadrupled to $4.4 billion during the quarter.
  • The company generated underlying cash flows (excluding oil spill expenses) of $19 billion for the first nine months of 2018, which covered for its organic capital expenditure and dividend payments. Given the improving commodity prices and robust pipeline of projects, BP will now pay a quarterly dividend of 10.25 cents per ordinary share, or 61.5 cents per ADS, as opposed to 10 per cents in the year ago quarter.

  • In terms of update on the BHP acquisition, BP expected to close the deal  on 31st October. The deal is expected to give BP access to the liquids-rich Permian-Delaware basin, as well as premium positions in the Eagle Ford and Haynesville basins. The deal will add over 4.6 billion barrels of oil equivalent of high quality resources in the liquids-rich Permian-Delaware basin, the Eagle Ford and Haynesville basins that will drive BP’s value going forward. The company expects the deal to be accretive to its earnings and cash flow per share and contribute an additional $1 billion to upstream pre-tax free cash flow by 2021.
  • On completion, the company will make a cash payment of 50% of the $10.5 billion consideration, net of the deposit and customary completion adjustments. Earlier, the company had expected to fund the transaction with a mix of cash and equity. However, with the rising commodity prices, the company now plans to fund it through its cash flows. Consequently, the proceeds from the additional $5-6 billion divestment program would be used to reduce its debt.


Going Forward

  • BP has started two major upstream projects during the quarter – Thunder Horse North West Expansion in the Gulf of Mexico, and Western Flank B on the Australian North West. Both the projects were started ahead of schedule and under budget.
  • Clair Ridge in the North Sea, which is in the final stages of commissioning and the next phase of West Nile Delta in Egypt, remain on track for start up in the fourth quarter. These projects, along with the already commissioned projects, will enable the company to meet its target of adding 900 thousand barrels per day of incremental production by 2021.

  • BP will continue to focus on its market led growth strategy for downstream operations, particularly in its fuels marketing business. The company will further expand its presence in major growth markets such as China and Mexico where it can offer differentiated high quality products and services to its customers. BP continued to grow its retail convenience partnership model, and has now rolled it out to around 1,300 sites across its network, with more than 370 BP branded sites in Mexico.
  • BP plans to maintain a tight organic capital spending budget of $15-17 billion over the medium-term, and gearing ratio within the range of 20-30%. For 2018, the company expects to spend $15 billion in capital investments and generate $3 billion from its divestment program (excluding BHP deal).
  • Further, the company continues to make investment in the broader advanced mobility space to achieve its lower carbon footprint targets. During the quarter, Air BP entered into an innovative collaboration with Neste, a leading renewable products producer, to secure and promote the supply of sustainable aviation fuel. In addition, its Lingen refinery in Germany piloted the use of green hydrogen in the production of fuel. These investments will enable the company to position itself  effectively in the fast-evolving electric vehicle market, while meeting its carbon emission targets.


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