BP Plc Is Getting Back on Track

Following an agreement with the EPA, BP Plc will be able to bid for new leases in the Gulf of Mexico.

Mar 18, 2014 at 12:48PM

Just a few days after BP Plc (NYSE:BP) announced a plan to separate the management of its U.S. onshore oil and gas business, a move that gives the company its best chance to capitalize on the shale boom in the U.S., its offshore business in the U.S. has received a big boost following an agreement with the Environmental Protection Agency (EPA). The latest development will help BP continue to get back on track.

The agreement
BP announced last week that it reached an agreement with the EPA that will allow the company to bid for federal government contracts. BP had been banned from bidding for new contracts, including new oil and gas leases in the Gulf of Mexico, in the wake of the Deepwater Horizon accident in 2010.

The agreement not only allows BP to bid for new leases in the Gulf of Mexico and elsewhere in the U.S., but also renew fuel supply contracts with the U.S. military and other government agencies.

With the agreement in place, BP will be able to bid for new leases in the Gulf of Mexico in an auction scheduled to be held later this week in New Orleans. The company, however, has not yet confirmed whether it will take part in this week's auction. Even if BP doesn't participate in the latest auction, the agreement is expected to have a significant impact on the company's output in the long term.

Implications
Although BP remains one the largest leaseholder in the Gulf of Mexico, the ban meant that the company was not able to participate in three auctions held since 2012. As a result, BP was last year surpassed by its European rival Royal Dutch Shell (NYSE:RDS-A) as the biggest crude oil producer in the Gulf of Mexico. BP's own production in the Gulf of Mexico has fallen to just 190,000 barrels a day, which is significantly below what the company was producing before the oil spill disaster. The company's production has fallen even though it has 10 drilling rigs working in the region, up from six in 2009.

With the ban now lifted, BP will now be in a position to boost its production in the Gulf of Mexico and get back to the level seen before the oil spill disaster. In an update to investors recently, BP highlighted that relative to its peers such as Royal Dutch Shell, ExxonMobil (NYSE:XOM), and Chevron (NYSE:CVX), it had more value in deepwater. The company also noted during the update that it is choosing to make use of its leading deepwater capabilities and build on strong legacy positions in giant fields.

BP remains on track
Just a few days ago, BP had announced that it plans to separately manage its U.S. onshore oil and gas business. In my opinion, the move is the company's best chance to capitalize on the shale boom in the U.S., something big oil and gas companies have missed out on so far.

Back in February, BP had also reported encouraging quarterly results, with cash flow from operating activities of $21.1 billion. While this was lower than the company's capital expenditure of $24.6 billion, the company expects capex to remain between $24 billion and $25 billion in 2014 even as it expects operating cash flows to rise to $30 billion to $31 billion this year. In the longer-term, operating cash flows will get a boost from the company's strategy to focus on value over volume as well as from the latest development in the Gulf of Mexico. Meanwhile, the company expects capex to be in the range of $24 billion and $26 billion between 2015 and 2018.

With the latest development in the Gulf of Mexico, these targets look achievable for BP. If indeed the company achieves these targets then it will be in a solid position to maintain or even raise its shareholder distribution compared to its European and U.S. rivals. Additionally, the company will be also able to reduce its debt. While the asset sales post the Deepwater horizon accident have meant that BP is now much smaller when compared to the likes of Shell and Exxon, it is certainly the top pick among the major U.S. and European oil and gas companies, given the recent developments.

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Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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