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BP's Operational Outlook Improving With New Project Start-Ups

By: Trefis
Posted: 3/3/2014 1:49:00 PM
Referenced Stocks: BP;ACG;CVX;XOM

BP Plc. ( BP ) recently announced the start-up of a major project in the Deepwater Gulf of Mexico. The Na Kika Phase 3 project came online as first of the two new wells started oil production. This is the third major project start-up for the company this year as it plans to reverse the decline in production seen over the past few years. These new projects start-ups are helping a great deal in improving BP's operational outlook even as uncertainties associated with oil spill liabilities remain. (See: BP's Downside Risk From Climbing Oil Spill Expenses )

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 almost in line with its current market price.

See Our Complete Analysis For BP

BP has changed a lot over the last few years, primarily due to divestments made by the company in order to fund charges associated with the 2010 oil spill fiasco. By the end of 2013, the company had completed divestments of around $38 billion. A majority of the asset sales primarily included upstream installations, pipelines and wells while the company has managed to retain most of its (~90%) proven reserves. This has led to a sharp decline in BP's production volumes over the last three years. The volume of total hydrocarbons produced by the group fell by almost 21% since 2010 to 2,256,000 boe/d (barrels of oil equivalent per day) in 2013.

In a bid to recover its lost ground, BP started production from as many as five new projects in 2012 alone. Having started 3 more last year, the company plans to bring another 6 new projects online by the end of this year. We therefore expect BP's production volume to bottom out by the end of this year and gradually increase thereafter.

The three projects started in 2013 include the Angola LNG and the Atlantis North Expansion project in the Gulf of Mexico that began production during the second quarter, and the North Rankin 2 project that came online during the third quarter. Located approximately 85 miles off of the northwest coast of Western Australia, the North Rankin 2 project aims to extend natural gas supply from the aging North Rankin and Perseus fields by extracting low-pressure gas. Below is a summary of the major upstream projects started this year.

Apart from these three, other projects that are slated to start-up this year are also under construction and over 75% complete, which further bolsters our belief that BP's upstream production output should bottom out by this year. These new project start-ups are not only expected to boost upstream production volume but also operating margins. The company expects cash operating margin from these projects to be twice as much of its average upstream margin in 2011.

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