To lots of investors out there, the first thing that comes to mind when BP (BP +1.15%) is mentioned is the Macondo well blowout and the aftermath effect on the company in the following four or so years. In fact, shares of BP haven't even fully recovered to pre-Macondo levels even on a total return basis when we include dividends.
BP Total Return Price data by YCharts
Here's the thing--BP isn't the same company that it was at the time of the Macondo spill, and management makes a point to tell shareholders this all the time. Let's unwrap this message from management and take a look at a few other things that BP's executive suite wants you to know.
We're making big strides in safety to prevent another Macondo as best we can
Source: BP
There is no way to be 100% accident free no matter what the business, but BP's management and its operations staff are doing everything in their power to prevent another accident from happening again. In the chart above, it shows that BP has decreased what are known as Tier 1 process safety events -- which is any accident that involves a spill or a shutdown of operations for more than four hours -- by 75%. In doing so, it has also increased its operating efficiency, as fewer accidents means less downtime at any facility.
Ensuring safe operations is going to be critical for the company's future because not only is it just a good idea, but BP has the highest exposure to deepwater exploration and production of all the major integrated oil and gas companies.
Source: BP Investor Presentation
We've got shareholders' best interests in mind ...
The aftermath of the Macondo spill made BP and its people take a good hard look in the mirror as to what they were as a company. One of the things that it discovered is that it's job isn't necessarily to produce as much oil and gas as possible, but rather to produce oil that generates lots of free cash over the lifetime of a project. This focus on profitability rather than production has resulted in a major restructuring of the company, and because of it BP has sold off or divested itself of over $40 billion in assets to help pay for the Macondo spill, lower its debt profile, and give back to the shareholders in the form of dividends and share buybacks.
Now, as a leaner and meaner BP, the company is on track to generate close to $30 billion in free cash flow by the end of 2014, and it will use those excesses to buy back shares or potentially explore special distributions to its shareholders.
Source: BP Investor Presentation
But we've still got a going on in the pipeline:
Source: BP Investor Presentation
The most interesting aspect of this massive asset divestiture, though, is how little the company has actually given up to accomplish it. Despite unloading that much in assets, BP was able to hang on to 90% of its reserve base. Also, even though the company has implemented a program where a project needs to show that it could be profitable at $80 a barrel today, there is still a pretty large suite of projects that are expected to come online in the future. So while some might criticize the company for not being growth oriented with its new approach, there is still lots of room for the company to grow long term.
The Macondo well blowout will not break us ...
Source: BP Investor Presentation
Yes, just about everyone knows BP has been forced to spend lots of money on the Macondo spill. And, yes, the company is still on the hook for what the courts decide BP is liable for under the Clean Water Act, which could be up to $18 billion if the full penalty is enforced and the high estimate for oil spilled is used.
However, don't be fooled into thinking that just because the company is on the hook for all this money means BP will struggle to meet any obligations enforced by the courts. Today, BP has reduced its net debt to capital ratio to around 15% and carries close to $28 billion in cash and short-term investments on the books. So yeah, a maximum penalty could sting, but management has been planning for this for several years and has the war chest to cover it.
... and the sanctions on Russia won't either
"We know that the world will need 40% more energy by 2035 and Russia will remain a key producer." --Bob Dudley, CEO
The quote that Dudley gave on the company's most recent earnings call was considerably longer than that, but that little ending there sums it up best. BP is well aware of the sticky situation that it is in thanks to its 19.75% stake in Russian oil giant Rosneft as well as its massive acreage holdings in the country thanks to its previous ownership of joint company TNK-BP.
Source: BP investor presentation
As of right now, the company has said that it fully intends to do two things: 1) Remain in full compliance with U.S. and EU sanctions, and 2) keep a channel open with Russia because it is one of the company's most valuable long term assets. Unless this scuffle with Russia really starts to go south, BP will stay involved in Russia as much as it can and hopefully wait until better days to develop its massive potential in shale and the Arctic.
What a Fool believes
For investors in big oil companies like BP, one of the major value propositions is stability. Unfortunately over the past few years, BP hasn't been able to provide as much stability as many would hope. That being said, it looks like the further and further we get away from the Macondo spill the better BP is looking as an investment, It seems to have a much clearer path forward with the guiding light of generating cash flow leading the way. Provided there aren't many more curveballs being thrown by Western-Russian relations, then BP's management seems to be headed in the right direction.
