BP plc and Its Second Chance

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America is the land of second chances. Four years after the worst oil spill in American history, the Environmental Protection Agency is giving BP (NYSE: BP  ) its proverbial second chance by allowing the company to bid on new oil leases in the Gulf of Mexico again. The super-major was originally banned from doing so in 2012.  

For BP, the past four years have not been easy. The British company has had to sell significant assets to pay for the estimated $42 billion in potential litigation costs associated with the Macondo oil spill. The super-major's reputation has taken a major beating as it has been the subject of scathing criticism from government and media alike. The company's shareholders have missed out on one of history's greatest bull markets as many other oil stocks have rallied. 

But times are changing; the EPA's recent approval sutures another wound for the oil giant and brings back a sense of normalcy to BP. 

Return to normalcy
For BP, being allowed to bid on new Gulf of Mexico leases is very positive news.

Despite the large costs of the Macondo oil spill, BP firmly believes a big piece of its future lies in the Gulf. With 10 operating drill rigs in deepwater Gulf of Mexico at the end of 2013, the company is the second largest oil producer in the basin. In addition to being a large oil producer, BP is also the largest oil lease owner in the Gulf and plans to invest a miniumum average of $4 billion each year for the next decade to develop its leases. 

While $4 billion a year may not sound like much, it is a significant amount relative to BP's annual capital expenditure budget of $24 billion. 

By being allowed to bid on new leases, BP should be able to grow further in the Gulf and develop more acreage. It should be able to increase its revenues and oil reserves.

The EPA's recent decision is also good news for offshore drilling companies such as Transocean (NYSE: RIG  ) and Seadrill (NYSE: SDRL  ) . The offshore drillers may realize more revenue as total deepwater capital expenditures increase.

The bottom line
With most of the world's easy oil gone, the world needs offshore oil more than ever. Many of the world's recent oil field discoveries are deepwater or ultra-deepwater fields. 

In addition to offshore Brazil and West Africa, deepwater Gulf of Mexico is a big piece of that puzzle. The Department of the Interior estimates the Gulf of Mexico has 48 billion barrels of undiscovered oil. 

Research firm Wood Mackenzie expects that deepwater Gulf production will increase from 1.5 million barrels of oil a day today to 1.9 million barrels a day by 2020. 

For BP, the EPA's approval provides the opportunity for BP to grow again in one of the world's most promising areas. It allows BP to sharpen its focus on increasing its operating cash flow, raising its dividend, and buying back shares. In short, it allows BP to return to a safer business-as-usual environment.

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  • Report this Comment On March 18, 2014, at 2:19 PM, Interventizio wrote:

    Unfortunately, a major part of bp's reserves are in Russia, an unstable country if there is one. Were things otherwise, I wouldn't hesitate to increase number of shares I already own.

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Jay Yao

Jay is an energy and materials writer. He reports on oil and gas fundamentals and macro trends in the industry.

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