BP and India’s richest man are targeting this huge market

Jay Yao writes how BP and Mukesh Ambani’s Reliance Industries Limited are working together to meet demand for this huge market.

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Although it doesn’t get as much attention as the US or China today, India is going to be a huge economy in the future. In terms of population, the country has almost as many people as China, and over four times as many as the US. With this huge population and the expected huge economy, India will need a lot of energy for its development.

Given its status as a leading energy provider, BP (LSE:BP) is naturally helping. In 2011, BP partnered with Reliance Industries Limited, the company of India’s current richest man, Mukesh Ambani, to develop India’s oil & gas industry.

In December of last year, that partnership crossed a notable milestone. Here’s more on the milestone and why I think it’s good news for BP shareholders.

BP & Reliance Industries Limited partnership milestone

In terms of the milestone, BP and Reliance Industries Limited announced in December of last year that the first of three deepwater gas projects has come online and produced first gas.

Given how tough deepwater projects can be, first gas is a big achievement and reduces execution risk.

The milestone is a potential sign of future increases in production. When they are complete, the three projects cumulatively are expected to meet around 15% of India’s gas demand by 2023.

I reckon the milestone is good news for BP shareholders because production from the gas projects could help improve cash flow in the coming years. The British oil giant is trying to strengthen its balance sheet and transition into more green production at the same time. Having more cash flow will help with that.

Having more cash flow could also help BP achieve its target of net debt of $35bn. Once the company achieves that target, management plans to use a portion of the excess cash to buy back shares.

Bridge to a greener future

I think another positive from the milestone is that it makes BP more of a natural gas company. Although natural gas is still a carbon energy, it’s considered a bridge to a greener future by many analysts.

The energy form is considered a bridge because it is cleaner than coal and it can fill in the gaps of renewables in many areas. Although they may be cost competitive in many instances, renewables currently still have gaps. Solar can’t generate energy when it’s dark and wind turbines can’t generate energy when there is no wind, for example. With natural gas, regions have a potential fall back fuel that can generate energy to fill in those gaps.

Would I buy BP shares?

Lately shares have risen because oil prices have rallied and the Covid-19 vaccines have been more effective than expected. Although oil prices won’t rally forever, I’d buy and hold BP.

Given the expected return to normalcy in many parts of the West sometime this year, I reckon sentiment could continue to improve. In the future, I believe BP’s management has a good chance at remaking the company into a ‘green’ giant. If that happens, I think BP’s earnings will be more sustainable. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jay Yao has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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