BP, Azerbaijan Inks Extension Agreement to Azeri Oil Deal

Oil rig worker climbing - photo - September 2017The $10 billion y-o-y increase in fiscal 2017 second-quarter revenues to $57.37 billion keeps the stock of oil and gas company BP Plc. (NYSE: BP) bullish, despite reporting a decline in the underlying replacement cost profit, compared with last year. Other factors which support the bullishness are low volatility in the price of crude, which continues to trade at around $50 per barrel, and a decrease in the US crude oil inventories. We anticipate further upside in the stock, which ended Friday’s trading session at $37.82 up $0.12 or 0.32%, due to reasons given below.

Last week, the British company led a consortium of multinational companies, which include Chevron, Exxon, Inpex, ONGC Videh, and ITOCHU, in extending an oil exploration and production sharing contract (PSC) with the Stat Oil Company of Azerbaijan Republic (SOCAR). The contract covers the Azeri-Chirag-Gunashli (ACG) field in the Azeri waters (Caspian sea). BP stated that a new platform for production would be commissioned by 2020. The contract, which is valid until 2049, is yet to be ratified by the Azerbaijan parliament.

Analysts estimate that an investment of more than $40 billion will be made in the oil field, over the next three decades. The signed agreement will supersede the ACG-PSC agreement signed in 1994 by Heydar Aliyev, the Azeri President at that time and father of current President Ilham Aliyev. At the time of signing the first agreement, oil reserves in the ACG field were estimated to be about 511 million tons. However, the allocation of funds over the past two decades in the development of the field has resulted in a reassessment of the reserves.

The ACG field is now expected to produce a further 570 billion tons of crude oil, apart from 150 billion cubic meters of gas. Notably, the ACG field has already produced 430 million tons of crude and 134 billion cubic meters of gas.

The crude produced from the field is exported through the Baku-Tbilisi-Ceyhan oil pipeline. However, most of the gas produced is consumed locally. Talks are currently underway for exporting natural gas to Europe, via Turkey, through TANAP line of SOCAR.

The Azeri field has so far generated $125 billion in profits to Azerbaijan. Under the new agreement, SOCAR’s stake in the project will increase from 11.65% to 25%. BP will hold a 30.37% stake in the project – a decrease from 35.8% held earlier. BP will operate the field while Chevron, Exxon, Inpex, Statoil, ITOCHU, TP, and ONGC Videh would hold a stake of 9.57%, 6.79%, 9.31%, 7.27%, 3.65%, 5.73% and 2.31, respectively, in the project. Additionally, the BP led consortium will pay $3.6 billion to the Azeri state oil fund.

The extended contract is certainly a major milestone for BP. Russia, which faces severe sanctions from the West, is the second largest contributor to BP’s crude production and earnings. This contract would significantly reduce BP’s reliance on Russia. Following the signing of the contract, BMO Capital upgraded the stock of BP from “market perform” to “outperform” rating.

The price chart indicates that the stock has broken the long-term resistance at 37. Furthermore, the money flow index is rising upwards. That indicates an increase in the bullish momentum. So, we can expect the stock to move up and reach the next major resistance level of 43.

BP - Technical Analysis - 25th September 2017

We are looking for a call option to capitalise on the uptrend. A strike price close to $37 and a contract expiry date around October 4th is preferred for the trade.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.