Another blow for BP | FT Alphaville

Another blow for BP

BP just can’t keep out of the news these days.

After hitting the Gulf coast with its Macondo well oil spill last year, the oil major as of Saturday was seemingly involved in another major oil-infrastructure fail — the shutdown of its Trans-Alaska pipeline system due to a leak.

While the environmental implications aren’t likely to be as severe, the impact on US crude prices could be well felt if the shutdown remains prolonged.

The pipeline system itself is responsible for some 15 per cent of total US crude output. BP says 95 per cent of the production is currently affected.

And here’s a diagram of the route which stretches from Prudhoe Bay to Valdez via the Schork Report:

As the report’s Stephen Schork notes, BP owns 26 per cent of Prudhoe Bay and its surrounding fields, producing some 0.41m barrels in the region per day.

While that’s a fraction of the daily output coming out of most Middle Eastern fields it remains, as Schork notes, the largest source of Western Hemisphere crude oil after the Gulf of Mexico.

For BP itself, approximately 1 out of every 14 barrels of oil it pumps originates in Alaska.

For now, at least, the impact may be regionally constrained and mitigated by imports.

As Schork explains (our emphasis):

Declines from Alaska were more than made up by foreign sources, which rose from 0.30 MMbbls/d in 2005 (12.70% of the total) to 38.39% in 2005. The question traders face now is: How are imports doing? Looking at the latest weekly supply data, total crude oil imports for the week ending December 31st, 2010 fell by 0.37 MMbbls/d or 4.16%. Total imports now stand at 8.45 MMbbls/d, 5.22% above last year but 14.20% below the 2004-08 average. Good enough for the bulls, right? Not so fast.

As mentioned above, Alaskan crude is used primarily by refineries on the West Coast (PADD 5). Crude imports to PADD 5 increased by 53 Mbbls last week and now stand at 1.08 MMbbls/d, a whopping 50.42% above last year and just 0.28% below the 2004-08 average. In fact, PADD 5 is currently facing the fourth highest level of imports ever seen for this timestep.

Not only are we seeing high levels of imports, current inventories at PADD 5 are holding steady relative to last year: crude oil storage stands 1.82% above last year; RBOB inventories are 4.73% higher YoY; distillate inventories are 13.11% higher; heating oil inventories are 22.26% higher; and jet fuel stocks are 11.29% higher than last year.

Given how high supplies and imports are, it should not come as a surprise that refiner demand is muted: refiner net input of crude oil in PADD 5 stands just 0.08% above last year and 9.88% below the 2004-08 average.

So while the shutdown news is definitely bullish for prices — especially whilst information about its repair progress remains scarce — in Schork’s opinion it’s not yet enough to push crude oil above the $100 barrier.

Although, as he notes:

If production is reduced to 5% until March or April, then we’ll change our mind. But refineries dependent on Alaskan crude likely have several weeks at least of a cushion in inventories.

Of course, from BP’s perspective, it’s hardly reputation positive. What’s more, BP has had a well documented history of pipeline corrosion incidents across the system in the past.

Shares in the oil major were down some 2.5 per cent on the news in early Monday trade in London:

That was despite a relatively optimistic reaction from analysts to the US Spill Commission’s advance report which had pointed to an industry-wide cause for the Macondo spill.

As Merrill Lynch’s energy equity analysts had noted:

Strategic update: focus on LT growth potential The recent US Spill Commission advance report, pointing to industry-wide root causes for Macondo, has removed some uncertainties around BP’s future ahead of the strategic update (1 Feb), in our view. Whilst there are still other open fronts in terms of litigation/compensation, we now see investor attention focusing on (1) management’s ability to unlock value and (2) LT growth potential post disposal plan. To achieve this, we see a number of possible strategic routes for BP including (1) deepening the collaboration with NOCs; (2) setting NA alliances to reduce the number of GoM operated assets; and (3) further downstream disposals. We see quarterly dividends reinstated at US$0.07/sh with potential to introduce a share buyback programme once the disposal plan is complete. FY10 results: realigning production expectations FY10 results (1 Feb) will be key to gauge the strength of the underlying business.

As its path to recovery becomes clearer, we feel that BP should gradually close this gap, particularly heading into the strategy presentation. Reflecting what we see as reduced uncertainties on the Macondo process, we raise our PO to 550p. Neutral.

Although given the return of the ‘Alaska problem’ on top of the possible prospect of criminal charges for Macondo, we would say it’s possibly too early to be completely reassured.

And also note that Merrill has ‘realigned’ its production expectations.

In the E&P segment, we see extended maintenance/safety reviews across the board and the Chirag (Azerbaijan) field shut-in more than offsetting the oil price tail wind. We expect this along with the ongoing asset sale (-100kboe/d in 4Q) to result in a 10% YoY drop in prod to 3.64mmboe/d. In Downstream, we expect lower Marketing & Trading contribution and extended maintenance to put some pressure on divisional performance. All-in, we see 4Q adj NI (exc Macondo costs) at US$4.36bn (-20% YoY), well below a thin Bloomberg consensus of US$5.48bn. Closing the gap Assuming slightly lower upstream volumes and higher prod cost, we lower our 2011-12E EPS by 1.5%. BP trades on 8x 2011E P/E, a 13% discount to peers.

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