A Banged up BP is Still Worth $55

BP ( BP ) recently reported earnings that showed a 13% growth in replacement cost profits. While the company reported higher revenues on the back of high oil prices, its production levels fell by 11% because of divestments and lower production in the U.S. Gulf of Mexico. The company expects its production volumes to stay around current levels for the rest of the year. BP competes with other vertically integrated oil players such as Exxon Mobil ( XOM ), Chevron ( CVX ), ConocoPhillips ( COP ) and the Royal Dutch Shell (NYSE:RDS).

We have a $55.30 price estimate for BP , which is near a 20% premium over its current market price.

Upstream activity driving growth but hit by production declines

Despite declines in production volumes, high oil prices are helping BP generate a strong cash flow. Taking into account the divestments and acquisitions, BP's production volumes fell by 7% over the same period last year. However there has been significant growth in exploration and development with the company completing its purchase of 10 blocks in Brazil from Devon Energy and also ratifying an agreement that would allow it to jointly explore the Azerbaijan sector of the Caspian Sea. BP was also awarded 4 deepwater blocks in Australia and completed the purchase of a 30% stake in the 23 oil and gas production sharing agreements run by Reliance Industries in India.

Presently 38% of BP's crude oil and liquids production is concentrated in Russia where the output remained roughly flat while its liquids production from Europe declined by 10% year over year. Natural gas output also declined by 11% over the same period. Despite these declines, the company expects its overall production levels to remain at these levels for the rest of the year.

Downstream activity remains flat

BP's quarterly earnings before interest and taxes from its refining operations stayed flat at $1.8 billion. Improved refining margins were offset by weather related disruptions in its activity in North America and turn around activity. The company reported that its refining market margins were up 26% over the same period last year; however, this was offset by lower throughput. The company plans to continue to divest some of its assets in the downstream business including refineries, product terminals and pipelines over the future.

Growth in Alternatives

BP continues to expand its forays in alternative energy with the completion of a 250 MW wind farm in Colorado, which it set up in a 50:50 joint venture with Sempra Generation. It has also commenced construction on another 150 MW wind project in Texas. In biofuels, BP purchased 83% shares in Companhia Nacional de Açúcar e Álcool (CNAA) a Brazilian ethanol and sugar producer. While we don't expect much contribution from these initiatives in the near term, we nonetheless keep an eye on any major developments.

Click here for our full analysis of BP .

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

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

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.