For beleaguered BP plc (ADR) (NYSE:BP), the name of the game has traditionally been oil production, and more specifically, production in the deep water in the Gulf of Mexico. In fact, despite the low price of oil, BP stock has made the Gulf’s deep water a cornerstone of its future production growth. That was always considered a risky move, especially when its other rivals have continued to dive deeper in North America’s low-cost shale regions like the Permian and Bakken.
For BP stock, it’s meant trading at a constant discount compared to its peers and never fully recovering from its mishap in the Gulf of Mexico after roughly seven years.
But that could be changing. Thanks to an onshore partnership in the Middle East, BP is undertaking one of the largest fracking projects in the entire region. Moreover, that project is focused on natural gas. For BP stock, getting extra production from a cheap source could help it regain its mojo in a major way.
BP & Its BIG $16 Billion Project
One of the biggest problems facing the largest energy firms over the last few years has been overall dwindling production. When you’re a giant the size of BP or Exxon Mobil Corporation (NYSE:XOM), it takes a major project to really move the needle. For BP stock, it’s been especially frustrating. For one thing, it’s still dealing with ghosts of the Deepwater Horizon and fines associated with the disaster.
The other has been the lack of onshore fracking projects. Many of its rivals have moved heavily in the Permian basin and other low-cost, high-production regions in the U.S. For many of the major energy stocks, such as BP stock and Chevron Corporation (NYSE:CVX), production has finally started to turn the corner and ramp up.
BP, on the other hand, has continued to be the red-headed stepchild of the energy world. Shares of BP stock still haven’t recovered to its pre-recession highs, nor the level seen before the spill. A part of the reason has been its still-weak production growth.
But that could be finally be changing. BP has several major projects set to start producing energy this year, and the largest of them has finally had its spigot turned on.
The Khazzan gas field in Oman is a monster and holds an estimated 10.5 trillion cubic feet (Tcf) of natural gas. The field features tight gas reserves at deep depths that require specialized drilling equipment and knowledge. Luckily for BP, these are the same sort of conditions and geology that it has been tackling in the Gulf’s deep water, and with that, the firm has partnered with the Sultanate of Oman’s state-owned oil company to frack the rock.
The goal is to unearth 1 Bcf/day with BP getting 60% of the project’s production. Initially, 200 wells are set to be drilled. But an additional 100 well sites have been planned for the second phase of the project. Altogether, the megaproject will cost $16 billion to complete.
Important Milestone Moment for BP
With production from Khazzan starting to flow, this could be seen as an important milestone for BP stock. The energy firm is looking to raise production by about 800,000 barrels of oil equivalent (BOE) per day by 2020. That 800,000 barrels is about a third of its current production. That’s a tall order to fill, but its operations in Oman will make up the lion’s share of those efforts to raise production.
Moreover, the field in Oman is designed to help reduce BP’s reliance on crude oil. Of the 16 new projects BP has on deck, 12 of them are tied to natural gas, with the Oman gas field being the largest of these projects. This is especially important as the world shifts away from crude oil and toward lower carbon energy sources. Natural gas demand is still scheduled to rise as demand for oil begins a long-term decline. The whole point of the fields in Oman is for liquified natural gas export for electricity generation.
What’s really great is the profit and cash flow generation potential of the field. BP estimates that production from the field will come with higher margins than its portfolio average, which will be huge for cash flows and profits. Already, its initial wells have come in under budget and have been completed in less time.
Given the field’s long life, this could go a long way in supporting BP’s rich 6.25% dividend and could mark the end of asset sales to keep cash coming in.
A Turnaround for BP Stock
For investors in BP stock, the startup of the Khazzan is nothing put positive. After years of being the integrated energy sector’s whipping boy, BP may finally be turning a corner toward rising production and cash flows. While it’s still very early in the field’s life, the potential is great. BP could certainly use the good news, and its investors could too.
Ultimately, the start of the field could be the best thing to happen to BP’s shares in a long time. And this could be what’s needed to finally boost BP stock and move it in line with its peers.