Last week BP
The bad old days
The company has made tremendous strides in improving its value, to the point that I'm convinced that it ranks among the most attractive members of the Big Oil contingent. In fact, its ascendancy is all the more impressive given the trials and tribulations it's suffered in the past several years.Those woes included an explosion at the company's Texas City, Texas, refinery that killed 15 and injured dozens; an oil pipeline leak in Alaska; and a fire at its Whiting, Ind. refinery. The company also endured serious squabbles with its partners at TNK-BP, its big joint venture in Russia. And finally, an abrupt change in the CEO position resulted in the ascendancy of Tony Hayward, who appears to have performed yeoman's service in solving the company's raft of difficulties.
BP's big presentation
Before we proceed, let's see how BP stacks up against the three biggest domestic members of Big Oil:
| Company |
Mkt. Cap. |
Forward P/E (FY 2010) |
Yield |
|---|---|---|---|
|
BP |
$114 billion |
6.04 |
8.80% |
|
ExxonMobil |
$320 billion |
9.39 |
2.40% |
|
Chevron |
$117 billion |
7.29 |
4.30% |
|
ConocoPhillips |
$54 billion |
6.01 |
5.00% |
Source: Yahoo! Finance intraday on March 9, 2009.
After a brief acknowledgement that April marks BP's hundredth birthday, the presentation moved quickly to its central theme: cost controls. Mr. Hayward noted that by the end of 2008, the company had released 3,000 employees, putting BP on track to exceed its target of 5,000 by mid-2009. The cuts follow the company's expectation that 2009 will follow 2008 as the second consecutive year in which global demand will decline "probably by more than 1 million barrels per day."
The resurrected venture
Mr. Hayward next delved into TNK-BP, a crucial subject; his company spent much of 2008 quarreling with the three Russian billionaire partners who own the other half of the entity. By autumn, it appeared that a breakup of the venture was almost inevitable. That would have been nearly crippling to BP, since the partnership -- the third largest oil company in Russia -- represents a quarter of its global production and a fifth of its total reserves.
But the parties suddenly and surprisingly made up in January, and they now operate an immensely successful partnership. Indeed, as Hayward noted, in its five years of existence, TNK-BP's average reserve replacement has been around 200%, its proved reserves have doubled to 3.6 billion barrels of oil equivalent, and its average finding and development cost -- there's that cost theme again -- has averaged less than $3 per barrel.
Floating downstream
Iain Conn, the company's head of refining and marketing next discussed the turnaround and upgrades that he has initiated downstream. BP's three main U.S. refineries -- Texas City, Whiting, and Toledo -- are all expected to return to "strong competitive levels" in 2009, following substantial operating progress in each of the units last year.
Because of the accidents at Texas City and Whiting, BP is playing catch-up in its refining and marketing operations. As such, Conn completed his presentation by repeating and emphasizing last year's trio of objectives downstream: the delivery of safe and reliable operations, the restoration of earnings momentum, and the delivery of competitive returns and cash flows.
Andy Inglis, the upstream CEO, began his presentation by noting that, in 2008, BP had achieved a reserve replacement ratio of 121%, the 15th consecutive replacement level greater than 100%. Beyond that, the company grew production -- it's predicting production growth 1% to 2% through 2013 -- and held cash costs flat with 2007.
Into new horizons
During the year, BP concluded a deal with Husky Energy that got it into the Canadian oil sands in exchange for a stake in its Toledo refinery. It also linked up with Chesapeake
In terms of offshore locations, BP's taking a plunge into the deep waters off Libya, and it's had success in Gulf of Mexico lease sales. Indeed, according to consultant Wood Mackenzie, it's the leading resource holder in the deepwater Gulf, and its huge new Thunder Horse facility makes BP the largest producer there as well. Finally, it's also going to be poking around the Arctic, specifically the Canadian Offshore Continental Shelf -- a promising, if frigid, area, where only walruses and the likes of Royal Dutch Shell
In short, BP has mopped up spills on a variety of fronts, and it's making real progress under a solid management team. And how many other companies this sound would pay you a dividend greater than 8%?
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