We reaffirmed our Neutral recommendation on BP plc (BP) on Sep 20, 2013. The company’s strategy of offloading its non-core upstream properties will prove beneficial over time while creating a portfolio with stronger growth from a smaller base.
However, headwinds from a number of macro issues, which include sovereign debt risks, defaults on sovereign credits and changes in U.S. policies, are major concerns. BP carries a Zacks Rank #3 (Hold).
Why Maintained?
The U.K. giant expects its deepwater segment to form an integral part of its business goal as it is the largest leaseholder in the Gulf of Mexico (GoM) region, with stakes in more than 700 leases. In the deepwater GoM region, BP currently has seven rigs drilling this year, up from five rigs in the recent past. Another rig is expected to be added later in the year.
BP has a strong pipeline of projects and expects four additional upstream ventures to commence by the end of 2013. Of these, Angolan LNG and Atlantis North Expansion commenced operations in the first half of 2013, while Australia-North Rankin phase 2 and Azerbaijan-Chirag are on track to start production in the second half.
Six more project start-ups are expected by next year. Altogether, BP has about 50 major assignments through the decade. Eleven of these involve more than $10 billion in total cost.
During 2013, the company plans to drill 15–20 explorations wells, up from 9 in 2012. The company has already completed 4 wells in Brazil, North Sea and India, with 11 more exploration wells underway in the GoM, Brazil, Angola, Egypt, Jordan, India and Indonesia.
Moreover, a large gas condensate discovery in the KG D6 block of India, acquisition of new acreage in Norway, Brazil and China, two awarded blocks in the Barents Sea, as well as farm-in to one block in the South China Sea are expected to boost earnings going forward. BP’s upstream spending budget of $2.5–$3 billion in 2013 has also doubled in the last few years.
However, BP’s earnings and revenues decreased on an annualized basis during the second quarter. Earnings in Upstream experienced a decline due to lower liquids price realization and higher costs. Total production also fell on an annualized basis mainly due to field declines and divestments. Thus, the results raise concerns with respect to its performance in the coming years.
Other Stocks to Consider
While we prefer to remain on the sidelines for Valero, Zacks Ranked #1 (Strong Buy) stocks – China Petroleum & Chemical Corp. (SNP), Stone Energy Corp. (SGY) and Dril-Quip Inc. (DRQ) – could be good buying options for the short term.
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