BP's Portfolio Restructuring Raises Hope Amid Macro Risks

On May 23, 2016, we issued an updated research report on one of the world's major energy companies, BP plc (LON:BP) (NYSE:BP) .

The company is offloading its non-core upstream properties while creating a portfolio with potentially stronger growth from a smaller base. BP has already sold the refineries in Carson, CA and Texas City, TX, which hold half of its U.S. capacity. It has, however, retained three refineries – Cherry Point, Toledo (co-owned with Husky Energy), and Whiting – with the greatest competitive advantage, which is expected to improve returns.

BP’s upstream margins are likely to be driven by its four main upstream profit centers – Angola, Azerbaijan, the North Sea and the Gulf of Mexico. During the third quarter, BP was awarded five new blocks in the U.K. North Sea. In Oct 2015, the company received three shallow water blocks in the offshore Egyptian part of the Mediterranean Sea. The Woodside-operated Western Flank A project offshore Western Australia, the latest phase of the North West Shelf development, was also brought online in Oct 2015.

The company expects its U.S refining system to deliver a superior performance as it wraps up its re-positioning after the sale of its refineries in Texas City and Carson and the upgrade at Whiting.

However, BP announced divestitures of several non-core assets that comprise interests in many North Sea oil and gas fields and its Yacheng gas field in the South China Sea. BP is progressing with its divestment plan of multi-billion of assets. The huge asset sale forecasts raise concerns with respect to its production performance in the coming years.

Going forward, BP projects a weaker refining environment. This is mainly due to narrowing crude differentials in the low crude price environment.

Moreover, BP’s reliance on Russia and offshore activity worldwide increases uncertainty given sanctions and low oil prices. As Russia is the second-largest contributor to BP’s production and earnings after the U.S., Russian sanctions would adversely affect company’s operations and also the dividend income it is receiving from its Rosneft stake.

Stocks to Consider

Currently, BP carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the oil and gas sector include CVR Refining, LP (NYSE:CVRR) , Murphy USA Inc. (NYSE:MUSA) and Braskem S.A. (NYSE:BAK) . All these stocks sport a Zacks Rank #1 (Strong Buy).

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MURPHY USA INC (MUSA): Free Stock Analysis Report

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