My higher price estimate for BP plc (ADR) (NYSE:BP) (ADR) is underpinned by the expected consolidation in production volume during the next two years. The increasing volume through new production facilities is expected to offset the sale of several assets, which occurred in the past few years. In addition, increasing crude oil and natural-gas prices should enhance profits for both business divisions going forward.
However, the Deepwater Horizon disaster still lingers around BP plc (ADR) (NYSE:BP) (ADR), which curtails my positive outlook marginally. Below is my rationale on a higher stock price estimate.
More production facilities to compensate for the sale of upstream assets
The structure of BP plc (ADR) (NYSE:BP) (ADR) has changed considerably over the last two years. The company made divestments in order to fund charges related to the 2010 oil spill disaster. By the end of last year, BP announced the divestment of approximately $38 billion.
It must be noted that a majority of the assets sold were from the upstream business, which meant a sharp decline in production volumes during the past two years. Since 2010, the volume of hydrocarbon produced by BP plc (ADR) (NYSE:BP) (ADR)’s subsidiaries fell significantly to 1.9 million barrels, which represents a 21% decline.
In an attempt to reclaim the lost ground, BP launched five new projects during last year. Furthermore, the company plans to launch 10 new projects during the next two years, Therefore, its production volumes are expected to take off from 2015 onward. Below is a brief summary on the projects started by BP during 2012.
- BP, along with a few of its partners, initiated production from Skarv field in the Norwegian Sea last December. Production volume that’s expected is 125,000 barrels of oil each day during the initial six months. Thereafter, production volume is estimated at 165,000 boe/d. BP holds an approximate 24% stake in the project, which implies net incremental production of 40,000 boe/d accredited to the company when the production reaches its peak.
- At present, BP holds a 56% stake in the Galapagos project. The project began during last year in the Gulf of Mexico and promises a robust increase in production for BP. As the production reaches its peak, BP expects its share to rise from 15,000 boe/d to 26,000 by the end of 2013.
- During May 2012, production from the Clochas and Mavacola fields in Angola ramped up 65,000 boe/d. BP holds approximately a 27% stake in the project, which is expected to peak by the end of 2013.
- BP presently holds an approximate 90% stake in the Devenick gas project, which began last year in the North Sea. This project is expected to increase the company’s oil production propped up by 15,000 boe/d
Oil prices
The price for Brent Crude has experienced a sharp rise during the past decade. The increase price since 2003 has been close to 15% year-over-year, however, as per the projections offered by Trefis, the price is estimated to grow at 2.5% CAGR over the next seven years.
The growth in the price for Brent Crude is expected to slow down primarily due to increasing oil production from sources such as shale oil. This will result in rising oil supply from non-OPEC regions, leading to a decline in the price-bargaining power of several OPEC countries.
In the short run, negative oil supplies could send prices soaring high again, however, in the long term the current outlook only points to a balanced demand and supply ratio.
According to the latest report released by IEA, U.S. production is expected to increase by approximately 4 million barrels per day by the end of 2018, which will result in U.S. turning into a global net exporter of oil.
Competitive landscape
BP largely competes with Exxon Mobil Corporation (NYSE:XOM) in the downstream business. Exxon Mobil Corporation (NYSE:XOM) generates the highest percentage of its income through downstream operations (petroleum products) at around 71%. This is followed by crude oil and natural gas liquid (NGL) production as well as chemicals at around 9.5% each. The remaining portion of revenue is split between equity affiliates and natural gas.
Exxon Mobil Corporation (NYSE:XOM) is one of the largest companies by market cap and revenue. Its present market cap stands at $407 billion and its share price trades at round 97% of its 52-week high.
The company now plans to grow its presence in the upstream business, as large investments in exploration are on the horizon. It plans to invest $185 billion during the course of next five years in order to develop the upstream business.
During 2011, the company already spent more than $30 billion on exploration to strengthen its upstream business. The company expects to maintain an investment profile of $37 billion annually until 2016. The company has 21 gas projects in the pipeline through 2014. Since last year, the company has initiated nine projects, which are expected to add approximately 1 million net oil barrels each day until 2016. The nine upstream projects are expected to begin in West Africa, Kazakhstan and Canada
Similarly, BP plc (ADR) (NYSE:BP) (ADR) also competes with Chevron Corporation (NYSE:CVX) both in upstream and downstream businesses. Chevron generates the largest percentage of its revenue through refined products and chemicals at around 47.5%, followed by crude oil and NGL at around 42%.
Chevron Corporation (NYSE:CVX) operates on an EBITDA margin of 25%; however, the upstream business operated on an EBITDA margin of approximately 38% during fiscal 2012. The EBITDA margin for the upstream business increased 6% in the last four years primarily due to increases in the average prices for crude oil & NGL.
As per the projections offered by Trefis, the EBITDA margin is expected to decline in the future, as a large percentage of the company’s production stems from shale and oil sands, which are relatively expensive sources. Any downside or upside to its stock price in the long run will depend on how Chevron Corporation (NYSE:CVX) plans to manage those costs in the future.
What can hurt its higher valuation?
The oil spill disaster during 2010 resulted in BP making a whopping payment of approximately $33 billion. According to the company’s management, the spill charges recognized by BP stood at around $42 billion during fiscal 2012.
However, the rising claims associated to the incident forces me to hold a marginally conservative price estimate on BP’s stock. The uncertainties related to the claims have led to BP ignoring the previous guidance for the expenses.
While the company is trying hard to sort the matter, if the costs associated with the claims rise significantly, there may be a marginal downside to its stock in the near term. Investors should closely follow BP’s stance on dealing with the rising claim charges.
Despite the oil spill debacle, I expect the stock to outperform in the long run on the grounds of the projects launched during last year and the expected launches in the next two years.
Ashit Gulati has no position in any stocks mentioned. The Motley Fool recommends Chevron. Ashit is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Is There Upside to BP’s Present Trading Price? originally appeared on Fool.com is written by Ashit Gulati.
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