For ExxonMobil (NYSE:XOM), the infamous Exxon Valdez oil spill of 1989 was a fundamental catalyst for positive change. It instigated the company to minimize operational error as much as humanly possible and helped it become a much more disciplined, more profitable, and better-managed enterprise over the long run.
The 2010 Deepwater Horizon disaster seems to have had a similar impact on BP plc (NYSE:BP), forcing the British oil giant to sell tens of billions of dollars worth of assets, improve its safety and risk management, and focus on what it does best: drilling for oil. As a result of asset disposals and a renewed focus on its core business, BP's future is looking a lot brighter.
BP's asset disposals
BP's garage sale kicked off in the middle of 2010, with the company initially expecting to divest some $10 billion of assets over the next year to help pay for spill-related liabilities. But that estimate soon ballooned to $30 billion, as the company recognized the gravity of the situation.
Some of BP's biggest transactions have included the sale of onshore assets in the U.S., Canada, and Egypt to Apache (NASDAQ:APA) for $7 billion in 2010 and the $5.55 billion sale of its interests in a number of oil and gas fields in the deepwater U.S. Gulf of Mexico to Plains Exploration and Production Company in 2012.
To BP's credit, it was able to fetch surprisingly high prices for its assets, despite the fact that many were nearing the end of their productive lives. For instance, the sale of Gulf assets to Plains fetched more than $92,000 per flowing barrel of oil equivalent, significantly higher than comparable transactions for similar properties. All told, BP has divested a whopping $38 billion worth of assets since 2010, representing about a quarter of the company's $150 billion market capitalization. And it's not done yet.
More asset sales to come
BP's CEO, Bob Dudley, recently said that he expects the company to divest an additional $10 billion of assets by the end of 2015. The asset sales will be crucial in helping BP fund the cost of liabilities related to the 2010 oil spill -- now estimated at $42.5 billion -- and in returning more cash to shareholders.
Last year, BP returned a total of nearly $11 billion to shareholders through $5.4 billion in dividends paid and $5.5 billion worth of share buybacks. It also raised its quarterly dividend by 5.6% and plans to use much of the proceeds from additional asset sales to repurchase even more shares. Several of BP's peers are doing the same, reflecting big oil's renewed emphasis on placating shareholders.
Shell (NYSE: RDS-A), for instance, returned about $5 billion to shareholders last year through share buybacks and announced a 4.4% dividend increase last month, while Total SA (NYSE:TOT) recently increased its quarterly dividend from 0.59 euros a share to 0.61 euros a share. Similarly, Statoil (NYSE:EQNR) raised its dividend by 4% last year and plans to make more active use of share buybacks in coming years.
What's next for BP?
Despite its pledge to return more cash to shareholders and divest an additional $10 billion of assets over the next two years, BP is still planning to invest heavily in new upstream projects. Major projects set to come online over the next several years in Angola, the North Sea, Azerbaijan, and Gulf of Mexico will be crucial drivers of production and cash flow growth.
And this year, major project start-ups in the Gulf of Mexico, the U.K. North Sea, Angola, and Canada should help boost operating cash flow to $30 billion-$31 billion, allowing the company to cover dividend payments and capital spending of $24 billion-$25 billion. This expected trend of spending within its cash flow is one that should continue for the foreseeable future.
All told, BP is looking leaner and meaner these days, with its core business generating stronger returns on capital and set to generate much stronger cash flows in the years ahead. From a valuation standpoint, shares of BP currently look undervalued on the basis of both price to earnings and enterprise value to earnings before interest and tax (EBIT). If BP can avoid a charge of "gross negligence" in the ongoing spill trial, I think it should handily outperform its big oil peers this year.