BP Earnings Preview: Impact Of New Projects On Total Hydrocarbon Production In Focus

BP Plc. is scheduled to report its 2014 first quarter earnings on April 29. Average Europe Brent crude oil prices have been more than 5% lower year-on-year during the first quarter and will negatively impact the company’s crude oil revenues. Moreover, earnings would also be impacted by lower upstream production due to divestments made by the company to fund huge liabilities arising from the 2010 Deepwater Horizon incident. We will be closely watching out for the net impact of asset disposals and new project start-ups completed by the company over the past several months on its upstream production. Apart form this, we will also be looking for an update on the ongoing trials in the U.S. courts associated with the 2010 oil spill incident. (See: BP’s Downside Risk From Climbing Oil Spill Expenses)

Headquartered in London, BP is one of the world’s leading oil & gas multinationals with operations in more than 80 countries. As a vertically integrated oil and gas major, it has both upstream as well as downstream operations. The upstream division primarily includes exploration and production activities for oil and gas, while the downstream division focuses on producing refined petroleum products such as gasoline.

We currently have a $48 price estimate for BP, which is almost in line with its current market price.

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New Project Start-Ups

BP has changed a lot over the last few years, primarily due to divestments made by the company in order to fund charges associated with the 2010 oil spill fiasco. By the end of last year, the company had completed divestments of around $38 billion. A majority of these asset sales primarily included upstream installations, pipelines and wells while the company has managed to retain most of its (~90%) proven reserves. This has led to a sharp decline in BP’s production volumes over the last three years. The volume of total hydrocarbons produced by the group fell by almost 21% since 2010 to 2,256,000 boe/d (barrels of oil equivalent per day) in 2013.

In a bid to recover its lost ground, BP started production from as many as five new projects in 2012 alone. Having started 3 more last year, the company plans to bring another 6 new projects online by the end of this year. We therefore expect BP’s production volume to bottom out by the end of this year and gradually increase thereafter.

The three projects started in 2013 include the Angola LNG and the Atlantis North Expansion project in the Gulf of Mexico that began production during the second quarter, and the North Rankin 2 project that came online during the third quarter. Located approximately 85 miles off of the northwest coast of Western Australia, the North Rankin 2 project aims to extend natural gas supply from the aging North Rankin and Perseus fields by extracting low-pressure gas. Below is a summary of the 3 upstream projects that came online during the first quarter of this year.

  • In January, BP started production from the West Chirag platform of the Azeri-Chirag-Gunashli field in the Azerbaijan sector of the Caspian Sea. The company said that output from the platform would be ramped up during the year as additional wells come online. The platform has a capacity of 183,000 barrels of oil per day. BP holds a 35.8% operating interest in the project.

  • In February, Shell started up the Mars B project in the Gulf of Mexico, which is expected to ramp up total hydrocarbon production from the Mars field to 100,000 barrels of oil equivalent per day (boe/d) by 2016. Last year, the Mars field produced at an average rate of over 60,000 boe/d. BP holds a 28.5% stake in the Mars B project.

  • Just a couple of weeks after the Mars B project came online, BP announced the start-up of the Na Kika Phase 3 project. The project included drilling and completion of two new wells along with the development of subsea infrastructure supporting them and some new equipments to enhance production from an existing well. It is expected to boost Na Kika’s daily production rate from 130,000 boe/d to 170,000 boe/d in the coming months.

Apart from these three, other projects that are slated to start-up this year are also under construction and over 75% complete, which further bolsters our belief that BP’s upstream production output should bottom out by this year. These new project start-ups are not only expected to boost BP’s upstream production rate but also its operating margins. The company expects cash operating margin from these projects to be twice as much of its average upstream margin in 2011.

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