BP to Grow Dividend

After a multiyear period of shrinking because of the Macondo oil spill, BP finally is about ready to begin growing again

Stephen Simko, CFA 16 September, 2013 | 3:13PM
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A key challenge faces the oil majors: Replacing reserves is becoming increasingly difficult. To be sure, there's a lot of oil left in the world, but finding low-cost barrels has never been harder, in no small part because many governments now don't allow Western companies access to their resources.

Outside of Russia, BP (BP) produced the equivalent of 900 million barrels of oil and gas in 2012; this represents the level of reserves it needs to book annually in order to prevent reserves from declining. But there simply are not this many barrels of conventional (that is, low-cost) oil and gas reserves annually accessible to BP. This has forced the majors to increasingly focus on nonconventional resources - deep-water, oil sands and shale gas, for example. Therefore, at a given level of oil prices we’d expect BP's future returns to be lower as nonconventional resources are typically costlier to develop and produce this is one of the key reasons BP’s finding and development costs have been rising in recent years.

BP still has a long way to go before settling the remaining liabilities from the Macondo oil spill in 2010. In all likelihood it will be a multiyear process. Currently, we forecast $28 billion in remaining cash outflows after tax. It’s worth noting that the uncertainty surrounding BP’s Macondo exposure is very high. Any projection made today including ours is likely to be well off the mark. What we can say is that BP is well prepared to settle Macondo liabilities if oil prices remain high. The biggest risk we see is a prolonged period of lower oil prices; extinguishing its remaining Macondo liabilities could indeed stretch its balance sheet if oil prices decline toward $70 per barrel or lower.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BP PLC315.40 GBX0.56Rating

About Author

Stephen Simko, CFA  is a senior stock analyst at Morningstar.

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