BP Resumes Federal Business; Set To Expand In The Gulf of Mexico

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BP Plc. ( BP ) recently rejoined bidders for exploration and production leases in the Gulf of Mexico, after having been kept away from any federal contracts for over 16 months. The U.S. Environment Protection Agency (EPA) had banned the company from participating in any new government contracts after it pleaded guilty to several criminal charges related to the 2010 Deepwater Horizon incident in November 2012. However, the company recently reached an agreement with the EPA that allowed it to resume business with the federal government. The London-based oil and gas giant was the highest bidder on 24 offshore oil and gas blocks out of the 31 properties it pursued in the auction.

Headquartered in London, BP is one of the world's leading oil & gas multinationals with operations in more than 80 countries. As a vertically integrated oil and gas major, it has both upstream as well as downstream operations. The upstream division primarily includes exploration and production activities for oil and gas, while the downstream division focuses on producing refined petroleum products such as gasoline.

We currently have a $50 price estimate for BP , which is more than 5% above its current market price.

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The U.S. EPA had temporarily suspended BP from pursuing new contracts with the U.S. government in November 2012. This was shortly after the company entered into a $4.5 billion settlement agreement with the U.S. Justice Department for several criminal and civil charges related to the biggest offshore oil spill incident in the Gulf of Mexico.

However, BP reached an agreement with the EPA recently that allowed it to restart doing business with the U.S. government. As a part of the deal, the company agreed to improve upon its safety, ethics and corporate governance requirements. It also agreed to fund an independent auditor to conduct annual reviews on its compliance with the agreement for the next five years. Additionally, the EPA could also take a corrective action against BP if it is found to be in breach of the agreement.

This agreement with the EPA will help BP expand its drilling operations in the Gulf of Mexico, which contributed approximately 10.2% to the total hydrocarbon production reported by the company's subsidiaries last year. However, this figure has come down from around 16.6% in 2009, before the Deepwater horizon incident took place. This is primarily because of the dispositions that the company has had to make in order to settle several liabilities arising from the oil spill disaster. At the end of 2013, BP had completed divestments of more than $38 billion since the Deepwater Horizon incident took place.

However, BP's operational outlook has been gradually improving over the past couple of years as the company has been starting up new capital projects at a brisk pace and is also expanding its exploration program. The company started as many as eight new projects in 2012 and 2013, and plans to bring another six new projects online this year.

It has already announced first production from three out of six new projects planned to start-up this year, and two of these new projects are located in the Gulf of Mexico. These two projects are expected to add more than 31,000 barrels of oil equivalent per day to BP's total hydrocarbon production at their peak capacities, which is equivalent to around 17% of what the company's subsidiaries produced from fields located in the Gulf of Mexico last year. (See: BP's Operational Outlook Improving With New Project Start-Ups)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: BP , XOM , CVX

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