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BP South China Sea Venture OK???d

Zacks Equity Research

BP Plc (BP) recently won approval from the China’s Ministry of Commerce (:MOFCOM) for natural gas exploration in South China Sea. This marks the company’s second deepwater venture off the coast of China following its purchase of a 41% stake in another block in the region in September 2010.

The nod from MOFCOM entitles BP to have 40.82% share in block 43/11 during the exploration phase. However, it will get reduced to approximately 20% upon the commencement of production. China's biggest offshore oil explorer, China National Offshore Oil Corporation (:CNOOC), enjoys the operatorship of the block 43/11. The entry of BP will enforce U.S. based Anadarko Petroleum Corp (APC) to diminish its stake to 24.5%, which was previously 50% in the block under a contract with CNOOC.

Excluding the deepwater operation, BP seeks for conventional and unconventional natural gas activities, integrated refining and chemicals as well as high-end lubricants in collaboration with Chinese partners. Since its entry in China in the late 1970s till year-end 2010, BP has invested approximately $5 billion into the country.

Recently, BP reported better-than-expected fourth quarter 2011 earnings due to higher price realizations. The company’s focus on a string of upstream activities in high margin areas like the Gulf of Mexico, Angola, the North Sea, Brazil, Australia and India also bode well for its future growth.

Nevertheless, the British oil giant faces considerable risk from a decline in natural gas processing margins and a drop in domestic oil and gas drilling and end market demand that could lower the growth rate. Hence, we prefer to remain on the sidelines and maintain our long-term Neutral recommendation. The company also holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

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