BP ( BP ) has been making news headlines recently with its announcement that it intends to acquire a 30% stake in 23 oil and gas blocks operated by Reliance Industries in India. Below we take a look at what this means for BP and its competitors - which include oil and gas majors ExxonMobil ( XOM ), Chesapeake ( CHK ), Anadarko ( APC ) and Chevron ( CVX ).
BP at a Glance
BP is one of the world's leading oil & gas companies with operations in more than 80 countries providing customers with fuel, energy, retail services and petrochemicals products for everyday items. It is the third largest of the six oil & gas 'supermajors' after Exxon Mobil and Royal Dutch Shell.
Our analysis of BP shows that the company derives almost 60% of its value from its production and sale of oil and natural gas. The remaining value can be attributed to midstream activities, energy trading, refining and marketing. The impact of any adverse changes in its oil & gas operations on BP's value can be understood from our recent article titled Unrest in Libya Could Jeopardize BP Exploration Deal .
While the unrest in the Middle East and North Africa is a source of concern for BP in the long run as it could impact its long-term production capacity, the announced Reliance deal would act as a good hedge for the company.
6% Upside - Successful and timely implementation of the deal with Reliance
BP would be paying an aggregated $7.2 billion for the 30% stake in the oil & gas blocks which are already operational. Reliance currently produces about 1.8 billion cubic feet of gas through its operations at these sites - representing more than 40% of India's total natural gas production. Successful implementation of BP's deal with Reliance Industries would also give BP access to approximately 270,000 square kilometers (more than 100,000 square miles) of exploration.
BP currently produces around 7.5 million cubic feet of gas daily. By combining BP's share of Reliance's current production capacity of about 1.5 million cubic feet of gas daily to this figure from 2011, and assuming that this production would double to reach 3 million cubic feet by 2017 this represents a 6% upside for BP based on our estimate for the value of its stock. Its value would then cross $57 from its current value of around $54.30.
5% Downside - Expenses from the Deepwater Horizon oil spill exceeds initial estimates
In April 2010, an explosion in the BP-operated Deepwater Horizon drilling rig resulted in the world's biggest oil spill. The spill which continued for 3 months resulted in almost 4.9 million barrels of oil leaking into the Gulf of Mexico.
BP anticipates the spill to cost them a total of $39.9 billion including the costs for cleanup and compensation. BP has already incurred $11.6 billion in cleanup costs and has spent $3 billion as compensation for victims of the spill. We had estimated $6.3 billion worth of additional costs for each of the next four years, after which there would be insignificant expenses to BP.
However, if the expenses actually incurred are even 10% higher, then BP would end up paying $7 billion for the next four years. This could knock-off almost 5% of BP share price bringing our estimate to below $52.