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To improve their overall profitability, oil and gas companies are rapidly expanding in Angola. The country is ranked as the 2nd largest crude producing country in Africa, and the 8th largest exporter in the world. It has over 10.47 billion barrels of oil reserves, and produces 1.75 mbpd of high-margin oil annually. To further bolster its economic growth, the Angolan government is aiming to produce 2mbpd by 2015, which leaves a lot of expansion room for oil and gas companies operating in the country.

Budding Activities in Angola

Chevron (NYSE: CVX) has been operating in Angola for the last 50 years, and its consistent expansions have propelled it to become the largest hydrocarbon operator in the country. The company launched its LNG plant in Angola last month, which was developed for a total cost of $10 billion. The liquefaction plant has a processing capacity of 5.2 million tonnes per annum, and is expected to play a vital role in supplying LNG to nearby countries.

As of now, Chevron, Eni (NYSE: E) and BP (NYSE: BP) own 36.4%, 13.6% and 13.6% stakes in the export facility, respectively.

Even Eni has been active in the Angolan region for the last 30 years. The hydrocarbon behemoth has manufacturing facilities in mainly European and African countries, and recently discovered its 9th oil block in Angola. According to Eni, the newly discovered oil reserves have the potential to produce up to 5,000 barrels of oil per day. This may not be a huge discovery for Eni, but it is definitely a step forward towards expanding its hydrocarbon reserves.

But despite these lucrative discoveries, I believe that BP offers the most value.

Why BP

BP has sold over $50 billion of its non-core assets over the last 2 years, to focus on its core competencies and improve its overall profitability. The oil behemoth is gradually entering areas with high margin oil, to keep up with the rising inflationary pressures and to offset its oil spill related losses. And to do that, BP has been aggressively expanding in the Angolan region.

According to its management, Angola’s hydrocarbon assets are the most profitable assets in BP’s entire portfolio. Its PSVM project in the country is currently producing around 100,000 barrels of high margin oil per day, which is expected to swell up to 150,000 bpd by the end of 2013.

Its ground-breaking 4D seismic imaging capabilities are further expected to boost its overall profitability. Its management stated that the new imaging technology can (theoretically) push the profitability of its Clair ridge and Shetland fields to record levels. It is due to this that cash flows from the regions are expected to double by the end of 2013.

As of now, there are very few companies (like Shell) that make use of 4D seismic imaging to bolster margins. Altogether, BP’s asset divestitures may shrink its overall revenues. But with its portfolio restructuring and high margin projects, I believe that BP can boast one of the highest margins in the entire oil and gas industry. But there’s a hindrance.

Over-Hyped Losses

For the last couple of years, BP has been dragged down due to oil spill related penalties and the loss of goodwill. And rightly so, as it has spent around $14 billion on the clean-up work. Apart from that, BP is also being sued for economic losses. The good news is that there's around 38 weeks left remaining for the deadline for settlement filings against BP. And the not so good news is that several reports are suggesting that its settlement claims could rise as the deadline approaches.

As of May, the total number claims filed was just shy of a massive 170,000. But only around 41,000 claims were found eligible for payments, with an eligibility ratio of 24%. The total value of these claims has aggregated to $3.2 billion, out of which around $2 billion has already been paid.

According to Patrick Juneau (an attorney in Louisiana), these claims could surge to the 200,000 marks before the deadline approaches. It's only natural that people who would have incurred genuine economic losses would have filed for settlements by now. Still, if we go with an optimistic 25% eligibility rate, of the potential 30,000 claims (as estimated by Mr. Juneau), BP could be looking at around 7,500 genuine claims for an estimated remaining settlement of $700 million.

That accounts for nearly 21% of BP’s pending settlements and might absorb a fraction of shareholder value. However, it would be unwise to think that BP, which has a market cap of $131 billion, will be affected by an added settlement of just $700 million. In my opinion, BP’s pending settlement claims are being over-hyped, and the pros clearly outweigh its cons.

Final words

With that said, I think BP can come out of this mess unscathed. Its gross margins have already grown by 62% over the last 2 years, and will most likely continue to improve as BP continues to venture in high margin territories. At the current price, its shares appear to be undervalued with a forward P/E of 7.15x, while its modest payout ratio of 29.1% generates a lucrative yield of 5.25%. I believe that BP deserves a Buy rating.

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Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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