(By Mani) BP plc
) continues to make progress on executing its business strategy, which was implemented by its new CEO following the Macondo oil spill.
BP is one of the world's largest energy companies and is involved in exploration and production, gas, power and renewables, refining and marketing, and petrochemicals.
The company is addressing its priorities of reaching a final settlement in connection with the oil spill, stabilizing and growing its production and reserves, and restructuring and rebuilding its assets portfolio with a focus on value creation.
BP is eager to settle all oil spill financial liabilities for which it has paid and reserved $38 billion. The bulk of the remaining liabilities involving federal, state and local governments, including environmental penalty, for which BP reserved $3 billion. Each additional $1 billion payment would impact earnings by 50 cents per ADR.
"We believe reaching a fair and reasonable settlement with the US government regarding the oil spill would remove a major uncertainty and should boost the stock," Oppenheimer analyst Fadel Gheit wrote in a note to clients.
In addition, BP has recently entered negotiations with Rosneft and AAR regarding the sale of its 50 percent stake in TNK-BP, with 1 million barrels of oil equivalent per day (mmboed) of production and 4.2 billion of barrels of oil equivalent.(bboe) of reserves. These assets could be worth more than $60 billion but will probably be sold for half this amount.
"We believe the sale of its 50% stake in the Russian oil company, TNK-BP, could generate more than $20B, which may be used to create value for the shareholders," Gheit added.
For the second quarter, adjusted earnings were $3.7 billion, or $1.16 per ADR, down 35 percent from the year-ago period and 23 percent sequentially. Earnings were 81 percent upstream and 19 percent downstream, and 82 percent outside of the US. US earnings were sharply reduced during the quarter due to extensive field maintenance offshore, which is BP's most profitable production.
Earnings were negatively impacted by lower prices and production from field maintenance, lower TNK-BP results from higher duty due to oil pricing lag, cost inflation, and a loss in the North America gas business.
Cash balance was $16.6 billion at the end of the second quarter, debt was $47.7 billion, net debt was $31.1 billion, equity was $112 billion, and net debt ratio was 22 percent. Based on benchmark oil and gas prices, BP is expected to generate operating cash flow in excess of $30.9 billion, which is sufficient to fund $22 billion capital expenditures and $5 billion dividend.
The company is generating cash from asset sales of $24 billion since 2010 and expects another $14 billion before the end of 2013.
"After funding $22 billion in CAPEX and $5.6 billion in dividend this year and $22.4 billion in CAPEX and $5.8 billion in dividends projected in 2013, with asset sales of around $5 billion anticipated in both years, BP would have free cash flow of $8.5 billion and $8.7 billion, respectively," Gheit noted.
BP expects a 50 percent increase in operating cash flow by 2014. Half of the increase is due to the end of payments into the oil spill trust fund following the fourth quarter of 2012. The other half is expected to come from restoring high-value production and the start-up in the third quarter of 2013 of the Whiting Refinery after completing the modernization project this year. The refinery will be capable of processing more than 80 percent lower cost heavy crude.
On the valuation front, BP is trading at P/E and P/CF multiples well below the averages for its peer of major integrated oil companies. Its dividend yield is above the group average, but its debt ratio is higher and return on average capital employed is lower. Its implied reserve value is well below the peer average, but so is its unit profit.
BP ADRs have declined 4 percent this year, compared with the peer group which traded flat for the year on average and a gain of 11 percent for the S&P 500. It is currently trading at 15 percent below its 12-month high and 22 percent above the low, compared with 9 percent and 26 percent for the peer average and 2 percent and 30 percent for the S&P 500.
"We believe a reasonable settlement with the US federal, state, and local governments would remove uncertainty and boost the stock price. We also believe a final resolution in connection with BP's intention to sell its 50% stake in TNK-BP would significantly strengthen BP's financial flexibility and boost its stock," Gheit said.