BP Signs $22-billion Oil Deal with Abu Dhabi

Issues new ordinary shares representing about 2% of its issued share capital

b1British oil company BP PLC (NYSE: BP) signed an agreement with the Supreme Petroleum Council of the Emirate of Abu Dhabi and the Abu Dhabi National Oil Company (ADNOC) that grants BP a 10% interest in Abu Dhabi’s ADCO onshore oil concession, which has a life of 40 years, as reported by Bloomberg on December 17th, 2016. In addition to the interest in the ADCO concession, BP becomes a 10% shareholder in ADCO, the Abu Dhabi Company for Onshore Petroleum Operations Limited, which operates the concession. The agreement includes BP becoming an asset leader for the Bab asset group within the concession.

In return, BP will swap about $2.2 billion of its own shares for the 10% stake in ADCO. BP has agreed to issue new ordinary shares representing approximately 2% of its issued share capital (excluding treasury shares), to be held on behalf of the Abu Dhabi Government. The issuance of the new ordinary shares, priced at 447 pence a share, is subject to certain listing requirements and is expected to be completed shortly. Abu Dhabi investor Mubadala Development Co. is likely to hold the BP shares.

The agreement promises BP additional cash flow and revenue following a downturn that has forced the industry to slash billions of dollars of investments worldwide in the past two years. The payment in shares also helps BP preserve its own cash and maintain a balance sheet that has seen debt and leverage rise during the oil-price collapse, while providing BP with long-term access to significant and competitive resources.

BP has been present in Abu Dhabi since 1939 and held a 9.5% stake in ADCO, which operated the onshore fields since the 1970s. This concession expired in 2014 and Abu Dhabi started negotiating partnerships again in 2015. BP also has stakes in offshore fields and a gas liquefaction company.

Oil deal to ramp up BP’s production

BP is one of the world’s major energy companies, with its upstream business focused mainly in the US, with significant presence in the Caribbean, Africa, Europe, the Middle East, and Asia/Pacific. The Company’s downstream business consists primarily of US refineries, along with presence in Europe, Asia/Pacific, and Africa. BP also owns a 19.8% stake in Russia’s state oil company Rosneft OJSC, acquired in a $55-billion deal in 2013.

The current deal will provide an output of 160,000 barrels a day, in addition to the 95,000 barrels BP now produces in Abu Dhabi. According to BP, the 40-year concession includes the Bab, Bu Hasa, Shah and Asab fields with total resources of as much as 30 billion barrels of oil equivalent. France’s Total SA owns a 10% stake in the Abu Dhabi onshore concessions, Japan’s Inpex Corp. has 5%, and South Korea’s GS Energy 3%. ADNOC is still looking for partners to take the remaining 12% of the 40% reserved for overseas oil companies.

BP continues shopping spree

BP also agreed to buy stakes in gas-heavy exploration areas off the coast of Mauritania and Senegal from Dallas-based energy company Kosmos Energy Ltd (NYSE: KOS), as reported by Reuters on December 19th, 2016. The combined deals are worth around $3.4 billion and will add valuable oil and gas reserves to BP’s books.

BP agreed to buy a 62% stake and operational control of Kosmos’ Mauritania exploration blocks, which include the Tortue discovery, estimated by Kosmos to contain more than 15 trillion cubic feet (tcf) of gas. BP also agreed to buy a 32.5% stake in Kosmos’ Senegal blocks, spending in total around $1 billion on the Kosmos deal. They follow BP’s purchase of a stake in Eni’s giant Zohr gas field offshore Egypt for $375 million in November 2016.

BP’s Q3 FY16 financial highlights

In its Q3 FY16, earnings results on November 01st, 2016, BP’s revenues fell 16% Y-o-Y to $48.04 billion. Total production fell 6% Y-o-Y to 2.110 million barrels of oil equivalent per day (MMBoe/d). BP sold liquids for $41.23 per barrel in the third quarter (versus $44.01 in the year-earlier same quarter) and natural gas for $2.77 per thousand cubic feet (versus $3.49). Overall price realization fell to $29.46 per Boe from the year-ago level of $33.25 per Boe.b2b3

Refining Marker Margin decreased to $11.6 per barrel from $20 in the year-ago period, while total refinery throughput decreased to 1,650 thousand barrels per day (MB/d) from 1,696 MB/d in the year-earlier period. Refining availability was 95.4% versus 94.9% in the year-ago period.

BP said its Q3 FY16 replacement cost earnings came in at $933 million, well ahead of forecasts of $780 million, but down 49% from the $1.8 billion recorded in year-ago same period, owing to a weaker price environment. The decline marks the ninth consecutive quarter that BP’s earnings have fallen from the previous period. This was mainly because Brent crude prices averaged $46 per barrel in Q3 FY16, down from $50 a barrel in the year-ago period. The EPS for the quarter stood at $0.30, falling 50% from the year-ago same quarter.

Operating cash flow for the period was $4.8 billion. The cash flows provided by its operations have been positive and stand at $2.5 billion as opposed to $5.18 billion for the same quarter last year. Cost-cutting will likely define the group’s activities in the near-term, as well, as BP revised its 2016 capital expenditure guidance to $16 billion from between $17 billion and $19 billion. CapEx in 2017, however, was kept in the $15 billion to $17 billion range.b4

OPEC output cut to benefit BP

The Organization of Petroleum Exporting Countries (OPEC) scored a major victory by clinching a major pact at a gathering of member nations in Vienna on November 30th, 2016, to cut oil production in an effort to prop up global crude oil prices. The deal is expected to normalize record global oil inventories, and is OPEC’s first production cut in eight years.

Oil companies including Exxon Mobil Corporation (NYSE: XOM), Royal Dutch Shell PLC, Chevron Corp. (NYSE: CVX), Total SA (NYSE: TOT), and BP PLC have together added $490 billion to their market value in 2016, the biggest gain in six years, following a 25% rise in benchmark Brent crude, according to Bloomberg. This follows an $850 billion loss in value in 2015 and $720 billion in 2014 as crude prices plunged below $40 per barrel. Brent crude fell as low as $27.10 a barrel in January 2016, the lowest since November 2003.b5

The Bloomberg World Oil & Gas Index of 58 companies is up 12% so far in 2016, the largest gain since 2009 following two years of declines. Energy companies are the second-best performers in the MSCI World Index after languishing at the bottom in 2015.b6

Shell and BP’s shares are headed for their biggest annual increase since 1999. Hence, every dollar increase in crude oil prices raises BP’s annual adjusted profit by about $300 million, according to the company’s website. In the interim, oil companies are reducing their operating costs by renegotiating contracts, making projects smaller, and trimming their workforce.

BP, which is still struggling with about $55 billion of costs from the 2010 oil spill, said it would cut 7,000 jobs by the end of 2017, or nearly 9% of its workforce. BP reduced operating costs by $3.5 billion in FY15 and expects to generate savings of $7 billion by 2017. It plans to cut 3,000 jobs in its downstream division by the end of 2017, on top of the 4,000 cuts in its oil and gas production business announced in 2015.

Stock Performance

b7BP’s stock stood at $36.56, slipping 0.08%, at the close on Monday, December 19th, 2016, having vacillated between an intraday high of $36.78 and a low of $36.55 during the session. The stock’s trading volume was at 4,580,070 for the day. The Company’s market cap was at $114.72 billion as of Monday’s close.

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