How BP's Exploratory Discoveries Will Fuel Its Future

It's been a year of ups and downs for energy giant BP . It's still dealing with financial penalties stemming from the Gulf of Mexico spill. At the same time, it's getting back to its core business operations and is in the process of fulfilling core strategic initiatives. Specifically, BP has announced several promising oil discoveries, including in the Gulf of Mexico, which would have been considered extremely unlikely just a few years ago.

With 2013 nearly in the books and 2014 on the horizon, it's clear that BP is a company still affected by the Gulf of Mexico oil spill. The good news for investors is that for those willing to be patient, the years ahead should be much better for BP than the past few.

Progress is slow, but steady
There's no denying the fact that the road back to health has been a long and winding one for BP. All told, it's paid more than $40 billion in damages from the Gulf spill, and will probably pay billions more as a result of its civil trial. In response, BP will keep a lid on spending over the next several years. The company advises investors it will keep capital expenditures between $24 billion and $27 billion per year through the end of the decade. Moreover, BP plans to make between $2 billion and $3 billion in asset divestments per year to continue optimizing its portfolio.

BP isn't the only oil major placing a cap on expenditures going forward. Poor downstream results and an uncertain global economic outlook have resulted in European peer Royal Dutch Shell adopting a policy of strict capital discipline. Shell recently scrapped plans for a gas-to-liquids project in the Gulf of Mexico that would have added 140,000 barrels per day to the company's production. Shell's total capital expenditures will reach nearly $45 billion in 2013, but that figure will likely represent a ceiling over the next several years.

Exploratory discoveries will fuel BP's future
Thankfully, BP has announced several promising oil finds this year that are critical to its future growth. Recently, BP announced what it considers to be a 'significant' oil discovery in the Gulf of Mexico at its Gila prospect, which it co-owns with ConocoPhillips . Although the exact size and potential of the find is yet to be determined, BP tells investors that the discovery "is a further sign that momentum is returning to BP's drilling operations and well execution in the Gulf of Mexico." This represents BP's third major discovery in the Gulf of Mexico in the last few years.

In all, BP has seen positive momentum in its exploration efforts this year. The company completed 15 exploration wells in 2013, with another nine exploration wells currently operating and seven potential discoveries in India, Egypt, Angola, Brazil, and the Gulf of Mexico. All told, BP believes that this year was its most successful for new field exploration in nearly a decade.

The announced discovery will obviously benefit ConocoPhillips as well. Conoco holds a 20% interest at the Gila well, and the find represents Conoco's fourth deepwater Gulf of Mexico discovery. Exploration and production efforts are critical to Conoco's future, as it's no longer an integrated major after spinning off its refining unit. That's why it's so imperative for Conoco to execute on exploration and production. Discoveries such as these are very promising for Conoco.

The bottom line
BP is still a company in transition. It's paid tens of billions in penalties from the Gulf of Mexico spill, and will probably have to pay billions more if it's found guilty of gross negligence. Moreover, BP is a slimmed-down company. It's had to divest billions of dollars' worth of assets to cover itself against these damages, and these asset sales have kept a lid on growth.

At the same time, there's light at the end of the tunnel. BP is improving performance in its core operations, and has announced a number of promising oil discoveries in key geographies. Furthermore, it's back to paying an industry-leading dividend, which the company recently increased. While the short-term outlook for BP will undoubtedly hold further bumps in the road, the long-term outlook remains promising. That's why long-term investors should hold BP with confidence.

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Bob Ciura owns shares of BP p.l.c. (ADR). The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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