Is There Upside to BP plc (ADR) (BP)’s Present Trading Price?

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BP plc (ADR) (NYSE:BP) (ADR)  is a global leader in oil and gas with operations in more than 80 countries. It is a vertically integrated organization with both upstream and downstream activities. The upstream business is predominantly comprised of the production and exploration of oil and gas. Similarly, the downstream business concentrates on offering refined petroleum products.

BP plc (ADR) (NYSE:BP)

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.

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