Edit Metric
|
||||||||||||||||||||
Details
|
||||||||||||||
BP (BP)Stock (Energy Industry, Oil & Gas Majors Industry)
 As oil prices continue to climb and people worry about global warming and terrorism, public opinion is swinging away from petroleum. BP is hedging its bets against the oil market by investing in emerging energy technologies like liquefied natural gas and renewable energy. As the U.S. power industry turns away from coal because its dirty emissions require costly retrofits to power plants, natural gas is poised to become a major source of electricity[5]; BP's investments in LNG processing plants mean that it will already be established in the market if demand in the U.S. increases and natural gas is needed to be imported from abroad. Fears of climate change, however, are driving legislation supporting a movement away from carbon-based forms of energy, meaning that natural gas may not be be-all-end-all of tomorrow. BP's development of renewables like wind, solar, hydrogen, and advanced biofuels, however, indicate that the company is preparing itself for several different visions of energy's future. [edit] Business Overview  BP is an oil major - one of the six largest non-national producers, refiners, transporters, and marketers of crude oil and natural gas in the world. It's also investing heavily in developing alternative energies like wind, solar, and biofuels. [edit] Business and Financial Metrics
Financial Discussion: Over the last five years, BP has grown its revenues and income every year except 2007. In 2007, the company posted revenues of $284.4 billion, up from $265.9 billion in 2006, and a profit attributable to shareholders of $20.845 billion, down from $22.3 billion in 2006.[9] BP was the only oil major (a group of vertically integrated oil and gas companies that operate in all parts of the industry, from exploration and production to refining and marketing) to post 2007 profits lower than 2006. This has been attributed to its downstream segment, as production reductions at its Whiting and Texas City refineries reduced output by about 200,000 bpd at both plants[10][11]. The Whiting outage was caused by a fire in April 2007, while the Texas City refinery was still reeling from an accidental explosion in 2005 coupled with that year's strong hurricane season (remember Katrina and Rita?). These production lags combined with rising oil, gas, and ethanol prices to drive up refining costs. Every other oil major, however, had to deal with higher input costs; only BP had such severe refinery problems as to cause overall income to decline. The company has been in the process of bringing its capacity back up, though; 2006 capacity was at 78%, but 2007 capacity averaged 84%.[12] 1Q08 Financial Discussion: In the first quarter of 2008, BP's replacement cost profit grew 48% year-on-year to a record $6.6 billion, thanks to oil prices averaging almost $100/bbl over the period. The company increased its upstream profits by $2.2 billion, and turned its 1Q07 downstream losses into $1.2 billion in replacement cost income.[13] 2Q08 Financial Discussion: In the second quarter of 2008, replacement cost profit grew 6% year-on-year, to $6.85 billion[14]; for the half year, it grew 23% year-on-year, to $13.44 billion.[14] High crude prices were the root cause of both increases, though higher taxes, lower refining margins, higher depreciation, and higher costs offset these increases.[14] Production for the quarter was reported at 3,830 MBOE/d.[14] The alternative energy segment entered into a wind project with Westar Energy in Kansas, bough a natural gas cogeneration plant from NiSource, Inc (NI), and started construction on its Dominion Resources and NRG Energy wind farms.[14] [edit] Business Segments[edit] Exploration and Production (19% Revenue, 83% EBIT)[15]This segment seeks out oil and gas reserves, drills wells, and extracts and sells crude hydrocarbons in more than 100 countries around the world.[16] It is also responsible for BP's liquefied natural gas supply operations. In 2007, the company saw exploration and production profits decrease by $2.7 billion, because lower production and sales offset rising oil prices.[17] [edit] Refining and Marketing (88%, 19%)[18]BP's refining and marketing business takes crude oil and gas, refines it into products like gasoline or diesel, and then sells it through retail stations. In November, 2007, BP announced that it would sell the U.S. retail stations that it owns and operates to independent franchisees, dealers, and other distributors, because the rising price of oil was (and is) making refined petroleum much less profitable. This segment saw profits rise by $1 billion in 2007, due to fewer refinery outages than in 2006.[19] [edit] Gas, Power, and Renewables (8%, 2%)[20]This segment has some power generations operations, including interests in gas-fired plants with generating capacities totaling nearly 4.5 GW[21], as well as a focus on developing renewable energy. It is also involved in liquefied natural gas trading and marketing. This segment saw profits decrease by $800 million in 2007, due to some non-operating items as well as long-term investments in renewable energy that have not yet paid off.[22] At the end of 2007, BP announced a restructuring of its business segments in order to cut operating costs. The current "Gas, Power, and Renewables" division will be split, with portions going to the "Exploration and Production" segment, portions going to the "Refining and Marketing" segment, and non-fossil fuels going to the newly formed "Alternative Energy" segment.[23] 
[edit] Key Trends and Forces[edit] Rising Oil Prices and Falling World Production are Forcing BP's Operations Abroad, Exposing it to Political RisksSince the middle of 2007, oil prices have been trending upwards, to record highs; on the 21st of May, 2008, for example, oil traded at $134.10 per barrel[25], after averaging around $20 during the 1990s.[26] As one of the oil majors, BP controls oil resources in countries around the world; with oil prices soaring, the company's E&P segment has a strong incentive to push forward and explore in countries that are less politically stable 72% of BP's oil comes from North America and Europe[27], two regions where oil production is declining; expanding around the globe lets the company to keep growing its average reserve life. An international presence, however, makes the company highly vulnerable to terrorism, as well as property loss from nationalization. BP is most vulnerable to political uncertainties surrounding its operations in Russia. The company has a $20 billion stake in the TNK-BP venture - only half of what it's worth. Russian oil giant Gazprom has set its sights on acquiring the field; the company has a history of bullying foreigners into selling their holdings in the petroleum-rich country, has already announced that it is not only willing to buy BP's stake in TNK-BP for $20 billion by the end of 2008, but that the deal will happen (no comment from BP).[28] Furthermore, at the end of May, 2008, BP came under fire by some large shareholders of TNK-BP; they pushed for the CEO of the venture to be removed because they claim he has been acting solely in BP's interest, but BP has refused to acquiesce. Russian government raids into BP and TNK-BP's Moscow offices, supposedly for investigating allegations of industrial espionage, are indicative of BP's assets being in jeopardy. The Russian shareholders are planning to pursue legal action, as BP has refused to bend to their demands, and have already pulled their representatives from the board of the venture's main subsidiary.[29] [edit] As Natural Gas Production Grows Abroad, it Will Need to be Transported to Large Markets like the U.S., Making BP's Investments in Liquefied Natural Gas Potentially LucrativeIn the face of environmental criticism of coal as a form of energy, many electric utilities in the U.S. are adopting natural gas as the fuel for their large-scale generators[30] The supply to match this growing demand cannot be met solely through natural gas production in the U.S.; but importing natural gas requires the use of new technologies that convert the fuel from its gas form to a more-easily-transportable liquid form - liquefied natural gas (LNG). BP has a net production share of 310,000 mmcf at a LNG plant in Trinidad, 37.2 and 38% interests and LNG projects in Indonesia, a 15.7% interest in an Australian project, a 10% share of the Abu Dhabi Gas Liquefaction Company, and a 13.6% share of an Angola LNG project.[31] The company is also trying to enter the U.S. LNG market, and had proposed a $750 million liquefaction plant on the New Jersey side of the Delaware river, though U.S. Supreme Court ruled that the state of Delaware has the right to block the project because of a 2,000 foot pier extending into the river.[32] Despite the setback, BP's investments in LNG infrastructure give it access to the emerging LNG market. [edit] Investing in Alternative Energy is BP's Plan to Protect Against Future Production and Demand DeclinesBP CFO Byron Grote said in the third quarter 2007 earnings call that "we [at BP] are preparing for the longer term by building a new low carbon energy business".[33] The company has three renewable energy business: solar, wind, hydrogen, and biofuels. In 2007, BP's solar business produced 115 MW of solar panels, and started a $100 million project to expand yearly capacity to 228 MW.[34] The company has developed a new PV technology, dubbed "Mono", that increases power production by 5-8% over traditionally made PV cells, and is working in conjunction with institutions like the California Institute of Technology (Caltech) and the German Institute of Crystal Growth to improve production costs and cell efficiency.[35] Meanwhile, it continued to expand its wind energy business, growing its production capacity from 32 MW in 2005 to 370 MW in 2007, and intends to reach a production capacity of 1,000 MW by the end of 2008. The company is also exploring utilities-scale hydrogen power by forming a joint venture with Rio Tinto called Hydrogen Energy, and has partnered with DuPont to develop advanced biofuels from non-food crops like fast-growing grasses[36], and in August 2008 agreed to pay $90 million to license for 18 months the enzyme-based cellulosic ethanol production technology of Verenium Corporation.[37] The viability of biofuels is also being impacted strongly by increasing corn prices and soybean prices. Whether it’s because of the desire for energy independence, the rising price of oil, or fears of climate change, public opinion has turned away from petroleum, and it is driving government policy changes that encourage the adoption of alternative fuels. Environmentalists have been calling for a shift to renewable energy for years, and though the river of change is running slow, it is running deep. The Energy Independence and Security Act of 2007 is the first step towards a grander series of changes. By forcing automakers to achieve 35 mpg by 2020 and setting a Renewable Fuel Standard of 36 billion gallons of biofuels in 2022[38], the Act has potential to get the ball rolling to greatly reduce American dependence on hydrocarbons. Already, 24 states across the country have adopted Renewable Energy Standards to increase the share of renewables in their energy mixes, while the Democratic candidate for President has pledged to reduce carbon emissions 80%, to below 1990 levels by 2050.[39] Though the Republican candidate isn't so tough on climate action, he still supports a strong cap-and-trade system. Already, U.S. demand for oil is declining, down 1.3% on June 20th, 2008 year-on-year.[40] BP is continuing to develop its alternative energy portfolio, in spite of losing over $800 million on the Gas, Power, and Renewables segment between 2006 and 2007[41]. Investors interested in renewables should be wary, however, as BP has hinted before that it might sell its whole Alternative Energy arm (which it believes to be valued at $7 billion).[42] [edit] BP is Vulnerable to Natural Disasters, like the Hurricane SeasonThe Gulf of Mexico, where 18% of BP's upstream and 17% of its downstream production occurs[43], is prone to violent hurricanes during the last few months of summer. These storms can damage drilling rigs and refineries, and injure workers, so, like most oil companies in the region, BP reduces production during these months. Still, some storms can do real harm; Hurricane Rita, for example, forced the company to shut down its Texas refinery; as a result, it was running at just half capacity in 2007[44], contributing to the company's overall profit fall for the year. It also damaged the largest deepwater drilling rig in the Gulf, in which BP has an interest, forcing repairs worth $250 million.[45] [edit] CompetitionBP is the third-largest of oil majors[46], and so competes with the major and national petroleum companies, as other oil and gas exploration and refining companies don't come close to matching its scale. Most important among these:
 BP2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] Notes
|
Edit
History
Bookmark
