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BP Plc: Oil-Focused Growth Could Boost Valuation

 February 14, 2013 02:18 PM

(By Mani) BP plc (NYSE: BP) (LON:BP) due to the energy giant's strategy to focus more on oil production, shares valuation could improve, which would benefit from potential upside in the price level.

London-based BP has reshaped its asset portfolio through divestitures and investments with more emphasis on value over volume, with the bulk of future production coming from oil or gas linked to oil prices.

Through a combination of asset sales and investments, BP has created a strong platform for future growth. Given the high-quality nature of the portfolio, BP has decided to allocate more capital to upstream, up to 80 percent over the next decade.

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Over the past few years, BP has transformed its exploration portfolio and materially increased its unconventional inventory and is now early in the process of exploring the acreage, acquiring and interpreting seismic data and ramping up to 15 to 25 new exploration wells per year.

Fourth-quarter production, excluding TNK-BP, averaged 2.25 million barrels of oil equivalent per day (mboed), which comprised 52 percent oil and 30 percent in the US. Realized prices averaged $73.92/boe.

BP has a strong pipeline of projects and expects four additional upstream projects to come on stream toward the end of 2013. It is on track to deliver 15 major project start-ups by 2014, with a majority of them oil focused and in high-margin areas. BP started five of those projects last year, including Clochas-Mavacola offshore Angola, Galapagos in the Gulf of Mexico and PSVM in Block 31 in Angola.

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The company significantly increased its rig fleet from 15 to 19 rigs, including seven operational rigs in the Gulf of Mexico (GOM) drilling production and exploration wells.

"BP improved efficiency by 1 percent across its offshore portfolio and by almost 10 percent in its four highest margin areas," Oppenheimer analyst Fadel Gheit wrote in a note to clients.

In total, BP has around 50 major projects to progress through the decade. Of these, 11 are considered mega projects, which are greater than $10 billion in total cost.

"Of the projects that will be delivered out in the next five years, the average operating cash margin will be roughly double that of the 2011 upstream segment average, which provides an opportunity to grow cash margins through the decade," Gheit wrote.

BP expects 2013 production, excluding TNK-BP, to decline from the 2012 level of 2,281 mboed, mainly due to 150 mboed of asset sales, primarily in high-margin areas like the Gulf of Mexico and the North Sea. Once the stated projects go live and Whiting refinery gets upgraded, BP would witness an uptick in production.

BP's cash balance at the end of 2012 was $19.5 billion, which will increase by $14.9 billion from asset sales, mainly in connection with the Rosneft deal. The additional cash would give the company enough liquidity to settle all outstanding claims in connection with the oil spill, and buy back shares to prevent earnings dilution as a result of the Rosneft deal.

Moreover, the sell-off related to GOM oil spill, which has eroded $50 billion of BP's market capitalization since the explosion on April 20, 2010, has created an investment opportunity. The upside potential from the current price levels is significantly greater than any further downside risk from the oil spill.

"We think BP shares at current prices discount the worst-case scenario of more than $50 billion in potential financial liabilities, which, even if they materialize, are likely to be spread over several years, and, therefore, would not constrain the company financially," Gheit noted.

Longer term, BP expects continuous growth in operating cash flow into 2020, as 70 percent of its production will come from fields already producing and 85 percent of oil or oil-priced gas, with 50 percent of the cash flow from existing major profit centers: Angola, Azerbaijan, GOM and the North Sea.

BP expects operating cash flow of $30 billion to $31 billion in 2014, which represents more than a 50 percent increase from 2011. This growth in operating cash flows allows BP to increase reinvestment and grow the dividend in line with improving business conditions.

BP is currently trading 12 percent off its 12-month high and 17 percent above the low, compared with 8 percent and 20 percent, respectively, for the peer average. ADRs of BP, which trade 8 times its 2013 consensus earnings estimate, were trading between $36.25 – $48.34 during the past 52-weeks.



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