BP Gets on the Right Track
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Still lagging behind ExxonMobil (XOM), and Chevron (CVX), BP (NYSE: BP) is making headway through positive traction. The company was watched closely for the past couple of years to see how it would handle all of the messy cleanups, lawsuits, and excessive media coverage. Fortunately for investors, BP has surprised the naysayers and continues to impress the public with its clean initiatives and its proactive strategic plan to do whatever it takes to make things right.
Having spent a fortune in settlements and the cleanup of the Deepwater Horizon tragedy, BP wants to move forward with its focus and money on exploration and production of oil and gas products. After all the messy cleanup efforts for both the waters and coast as well as for BP's reputation, the company might finally get to see an end to it all --- at least financially speaking.
The company is seeking a $15 billion legal settlement with the U.S. Department of Justice over the Gulf of Mexico spill covering all civil and criminal damages and liabilities. The Department of Justice is looking for up to $25 billion, but realizes that a settlement would benefit both parties. The company has set aside $37.2 billion for all the charges related to the Gulf spill. The penalty under the Clean Water Act could be much higher if the company is found guilty of gross negligence.
BP had earlier reached a $7.8 billion settlement with third party claimants affected by the spill and is hoping to finally put all of this mess behind. The company had put in over $150 million into promotions to help the U.S. Gulf Coast recover its claim as a hot destination again, and apparently it has worked. That region claims to be back up and running with occupancy in hotels along the coast up 11% compared to the first quarter of 2010. BP spent even more money to help Florida, Louisiana, Alabama, and Mississippi to help with tourism.
BP is getting aggressive again. The company recently announced that it has begun work on the deepwater Galapagos project in the Gulf of Mexico. This is one of the six high margin projects the company had set to begin in 2012, sticking to its plan to invest at least $4 billion a year on oil and gas development in the Gulf of Mexico over the next ten years.
The project is expected to bring up about 130,000 barrels of oil equivalent a day when it is at full production by the end of June. Regarding this project, CEO Bob Dudley stated, "BP's continuing investment in the Gulf of Mexico is yet another example of our commitment to the U.S. economy and energy security. This investment, along with our ongoing commitment to the Gulf Coast region, demonstrates the importance of the U.S. to BP's long-term strategy." It is this stick-to-it strength that benefits the company's long-term production and profitability.
Last month, BP announced that it would spend about $400 million to install pollution controls at the Whiting, Indiana refinery, allowing the company to process heavy crude oil from Canada. This deal with the U.S. Justice Department and the Environmental Protection Agency removes a hurdle and allows the company to finally get back to producing up to 405,000 barrels per day.
The refinery is the sixth largest in the U.S. and can now put to use the over $4 billion worth of equipment BP installed to begin processing tar sands crude from Canada. The sands processing can begin as early as next year. Environmental groups believe that this agreement between BP and EPA will set a precedent for refiners seeking to upgrade their refineries to run tar sands crude in the future. After the project is complete, the refinery will be able to run up to 350,000 bpd in tar sands crude compared to the current process of between 70,000 and 80,000 barrels per day (bpd) Canadian crude.
Like Total (NYSE: TOT) and ConocoPhillips (NYSE: COP), BP is spending money from capital through its divestment program, up to $23 billion to date. The company had operating cash flow for the first quarter of $3.4 billion, compared to $2.4 billion in the first quarter of 2011. This puts the company on pace to achieve its 10-point plan to grow more value for shareholders over the next three years. Earlier this year, Total announced that it would spend $24 billion in organic investments in 2012, putting 80% of the funds toward upstream development. Total's Ichthys project, which will cost roughly $34 billion, is just one example. ConocoPhillips, meanwhile, has been reducing its refining operations, divesting nearly 2.5 billion over the past three years. The company has been putting more money into exploration and production, while its spin-off, Phillips 66 (PSX), will focus on refining.
BP has proven time and again that it can adapt and overcome through some of the most challenging situations. With a company poised to deliver even more in the future, and a leader not afraid to take calculated risks, it is hard to not include BP as one of the oil and gas favorites to own.
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