BP Upstream Projects Bode Well, Oil Spill Expenses A Drag

We issued an updated research report on oil British energy giant, BP (LON:BP) Plc (NYSE:BP) on Jun 6. The company has a strong portfolio of upstream projects that are expected to fetch significant cash. However, the oil spill incident of 2010 in the BP-operated Macondo Prospect is still affecting the company.

The company currently carries a Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.

BP expects the pipeline of upstream projects to add 800 Mboe/d to net production capacity by 2020, once they are online. It is to be noted that 90% of these upstream developments are either under construction or completed.

We appreciate the rigorous capital allocation strategy of BP. It is to be noted that majority of the capital will be spent on growth projects. Also, the company’s drilling operations are getting efficient as reflected by the steady decline in non-productive time since 2012.

Moreover, BP anticipates production in second-quarter 2017 to be flat with the January–March quarter of this year, supported by ramp up in key projects. On top of that, for the April–June quarter, the company expects the refining margin than first-quarter 2017. Hence, both the upstream and downstream operations look favorable for BP.

Also, the one-year pricing chart looks impressive as BP has outperformed both the Zacks categorized Oil & Gas-International Integrated industry and rival Royal Dutch Shell (LON:RDSa) plc RDS.A. During the aforesaid period, the company has gained almost 9% as against the gain of 3% for Shell and the 0.9% fall of the broader industry.

However, although BP has cleared the substantial litigation expenses related to the Macondo oil spill incident, it had to divest some of its best operating properties. The asset sales might hinder BP’s future cash generating opportunities. It is to be noted that the lost reserves/production from the group's asset sales cannot be ignored either.

Additionally, BP’s reliance on Russia and offshore activity worldwide increases uncertainty, thanks to sanctions and volatile oil prices. As Russia is the second-largest contributor to BP’s production and earnings after the U.S., Russian sanctions might affect the company’s operations and also the dividend income from its Rosneft stake.

During first-quarter 2017, BP invested $3.5 billion in organic projects. Moreover, the company expects organic spending between $15 billion and $17 billion for 2017. However, the trailing 12-month return on capital (ROC) for BP is not very encouraging. The company’s ROC, which stands at 2.4%, is lower than 3.7% of the broader industry.

Stocks to Consider

Better-ranked players in the energy sector include Canadian Natural Resources Limited (TO:CNQ) and McDermott International Inc. (NYSE:MDR) . Both Canadian Natural and McDermott sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

We expect year-over-year earnings growth for Canadian Natural of 702.4% for 2017.

McDermott beat the Zacks Consensus Estimate in each of the trailing four quarters, the average positive surprise being 387.50%.

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