BP (BP)

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WHAT HAS CHANGED?

  1. Impact of Covid-19 Pandemic

After halting exploration activity and curtailing capital expenditure in response to the Covid-19 pandemic, BP released a new strategic direction with a focus on renewables and mobility along with the second-quarter results. The company incurred an $11.8 billion of impairment charge and $9.6 billion of exploration write-off due to the revised outlook of oil & gas prices in the coming years. With renewable energy generation and electric mobility as key areas of profitable growth, BP is targeting a 4-percentage point jump in ROACE (return on average capital employed) from 8.9% in 2019 to 13% in 2030. Interestingly, the company plans to spend nearly 50% of its capital expenditure budget on the low carbon energy portfolio and future mobility solutions.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of BP's value that present opportunities for upside or downside to the current Trefis price estimate for BP:

  • Average Crude Oil & NGLs Sales Price: BP's average liquids sales price decreased from $90.20 per barrel in 2008, to $56.30 per barrel in 2009, as the world faced one of the worst economic downturns in recent decades. The global economy recovered, pushing BP's average realized liquids price to $73.40 in 2010, while various factors (including economic conditions and geopolitical unrest) pushed prices up above $100 in 2011, and kept prices high through 2012 and 2013, as well. However, global benchmark crude oil prices declined sharply thereafter on slower demand growth and rising supplies. According to the International Energy Agency's (IEA) estimates, the growth in global oil demand hit a 5-year low in 2014. This coincided with record growth in crude oil supply from non-OPEC countries, primarily the U.S., at 1.9 million barrels per day. As a result, the price of the front-month Brent crude oil futures contract on the ICE declined by around 50% in the second half of 2014. Consequently, BP's Average Crude Oil and NGLs Sales Price declined to almost $89 per barrel in 2014. The low oil price environment continued in 2015 & Average Crude Oil & NGLs Sales Price amounted to $47 for the year. This fall continued to drop to $38 in 2016. However, things reversed in 2017, and the price rose to $50.
    According to our estimates, BP's average liquids sales price is likely to increase to $55 per barrel in 2018, and rise back to around $107 per barrel by 2025. However, if a faster than expected increase in the demand for crude oil from developing countries, and a sharper than expected cut in non-OPEC supply growth leads to a quicker bottoming out process, and crude oil prices reach $122 per barrel by 2024, there could be a 7% upside to our current price estimate for BP.

  • Refining and Marketing EBITDA Margin: Historically, BP's Refining and Marketing EBITDA margin has hovered around the 2-3% mark, fluctuating slightly depending on the trends in global refining margins and the average price of oil realized in a given year. However, in 2013 and 2014, the company's downstream EBITDA margins dropped to just around 1.52% and 1.54%, respectively, due to industry overcapacity. In 2015, BP's EBITDA margins jumped to around 3.3%, driven by an improved refining environment and production mix, and the lowering of costs due to BP's simplification and efficiency programs. It further grew to 4.5% in 2016. However, it declined to 3.6% in 2017.
    Going forward, we expect margins to gradually decline to around 2% in the long run, due to continued overcapacity in the global refining industry, which will likely weighs on BP's plans to improve its downstream profitability. However, if the company manages to maintain its EBITDA margin at the current levels by the end of our forecast period, there could be a 36% upside to our current price estimate for BP.

For additional details, select a driver above or select a division from the interactive Trefis split for BP at the top of the page.

BUSINESS SUMMARY

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, hydrogen power, and carbon capture and storage (CCS).

SOURCES OF VALUE

Large base of proved reserves

Proved reserves is an extremely critical metric for an oil and gas exploration and production company. It represents the total quantity of technically and economically recoverable oil and gas reserves owned by the company at a given point in time. It directly impacts the company's production growth outlook. At the end of 2017, BP's total proved reserves stood at over 18.44 billion oil-equivalent barrels (both developed and undeveloped). These reserves consist more of more-profitable liquids (crude oil and natural gas liquids).

New upstream projects to drive higher profitability

BP started production from as many as eight new upstream projects in 2012 and 2013. In 2014, the company brought another seven new upstream projects online. These projects contributed significantly to the 2.2% y-o-y growth in its underlying oil and gas production in 2014. Currently, the company is working on several new projects that are expected to bring online over 1 MMBOED of cumulative production – net to BP – by 2021. These projects are expected to generate 35% higher cash operating margins and 20% lower development costs in contrast with the company's base portfolio in 2015.

KEY TRENDS

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 an increase in recent years towards increasing the complexity of refineries rather than expanding capacity. In the U.S., no new refineries have been built since 1980, however, improvements in process design and technology have seen capacity increase 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 crude. As a result of higher oil prices in recent times, heavy crude oil is becoming more economically attractive. In addition, the 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 is also increasing.

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