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BP Delivers Treats with Stronger Earnings, Share Buybacks

BP plc on Tuesday signaled more confidence in its global oil and natural gas businesses, as it doubled year/year earnings and said it has restarted share buybacks.

Increased production and robust refining margins helped the London-based supermajor to not only deliver strong earnings performance but also to reduce net debt for the first time in two years. BP’s austerity measures appear to be are paying off, as net debt fell to $39.8 billion, slightly lower than at the end of the second quarter.

BP’s third quarter underlying replacement cost profit, similar to U.S. net earnings, was $1.9 billion, compared with $930 million a year ago and $680 million in 2Q2017. The downstream division earned $2.35 billion, its highest mark in five years, while upstream profits jumped to $1.6 billion, turning around a year-ago loss of $224 million.

“If there were concerns about net debt, we wouldn’t be announcing buybacks,” CFO Brian Gilvary said. He hosted a conference call with analysts on Tuesday.

“We're on track in terms of what we expected to be,” he said. “If anything, we're slightly ahead of where we have anticipated to be this year, hence, why the announcement we had around buybacks and getting things back to neutrality.”
BP has been clobbered by payouts related to the 2005 Macondo oil spill tragedy in the Gulf of Mexico. The oil price collapse in the second half of 2014 forced management to install even more cutbacks.

“As you look out where we started from in terms of 2014, the rebuilding of the company out to 2017, where we are today, you will see the ramp-up of those projects that you saw this year start to come through next year, and therefore, you will start to see significant free cash flow,” Gilvary said.

Even if oil prices never rise above $50/bbl in 2018, “we're confident we can balance the books and indeed go lower than that if we need to,” said the CFO. “And the simple math for next year will be assumed capital in the range of $15-17 billion.

“If the oil price is around $50/bbl, we'll be at the low end of that range, which means you reach around about $23.5 billion to $24 billion of operating cash post tax to get everything back into balance. We may be slightly stronger than that given the trajectory that we're now on.”

Brent crude averaged $52/bbl in 3Q2017, versus $50 sequentially and $$46 a year ago. Henry Hub natural gas averaged $3.00/Mcf from $3.20 in 2Q2017 and $2.80 a year ago.

It’s taken BP two years-plus to bring the company into balance, said Gilvary, noting the revenue stream plunged as oil prices fell from $110/bbl at their height in 2014 to $28/bbl at the low point.

“I mean that was quite a move that any sector or industry would have to go through, to now find ourselves within two-and-a-half years to now get back into balance and honor the commitments around the dividend.”

Regardless of the oil price, paying a dividend and buying back shares should be sustainable, the CFO said.

“Now we can manage that for next year down to $45/bbl. We're comfortable we can do that. I think that's an unlikely scenario from where we are today. I think it's more likely being the $50, $55.”
Share buybacks “are an option for us in terms of the overall armory in the broader financial sense over the next few years as the additional projects come onstream, as downstream delivers the underlying performance that was laid out...at the end of February.”

In a five-year strategy update in February, CEO Bob Dudley said the company anticipates upstream production to climb on average by 5% every year to 2021 as seven projects come online this year and nine ramp up between 2018 and 2021. Organic capital spending is set at $15-17 billion a year through 2021. Upstream free cash flow (FCF) by 2021 is forecast to reach $13-14 billion, with downstream FCF of $9-10 billion.

Total production in 3Q2017 3.6 million boe/d. Excluding a contribution from partial ownership in Russia’s OAO Rosneft, output was 2.5 million boe/d, 16% higher year/year. After adjusting for entitlement and portfolio impacts, underlying production increased by 11% as major projects ramped up.

Lower 48 operations also are progressing smoothly, Gilvary said.

“I think we just continue to see in Lower 48 improvements around the way in which that business is run. We've got the operating cash breakeven down to about $1.50 now lower; in fact it was lower than that in 3Q. And on a free cash flow basis, we are comfortable at $3.

“That provides us lots of optionality as to where we go next and the opportunity set that we have in the Lower 48. It's one of the activities we can ramp-up relatively easily compared to other areas,” a decision for the Lower 48 team to ponder as it lays out plans for 2018.

Regarding Macondo, “we’re really into the tail now,” Gilvary said. Five years ago BP was facing about 147,000 in legal claims, “but we're down to now about 1,800..to resolve. We should know by the end of this year what the total landscape looks like, of what those claims count to.”
Some claims are expected to count to zero, some will not.

“The only final uncertainty really remains around those final 1,800 claims and what effectively the appeals bucket looks like versus what we have left provided,” he said. “And that'll be a separate process that we'll go through, through probably the fourth quarter and first quarter. But we should be able to update at the end of the fourth quarter.”

In the upstream division, BP now has six of its seven 2017 startups online, with the seventh set to begin before year’s end.

Along with ramp ups earlier this year in Egypt, Trinidad and the UK North Sea, BP brought online three more projects in the third quarter.

In July, Persephone in Western Australia began operations and is expected to produce around 50,000 boe/d. In August, Juniper, BP’s first subsea field development in Trinidad, came online and is expected to produce around 95,000 boe/d.

Production also began in September from the giant Khazzan natural gas field in Oman, BP’s largest 2017 start-up, which is expected to deliver 1 Bcf/d gross.

“Production will gradually ramp-up through a single 500 MMcf/d train, with a second identical train expected to come online in the next few months,” Gilvary said. “Production is expected to rise to 1.5 Bcf/d with further expansion of the project, which is on track for 2020. The two phases together will develop an estimated 10.5 Tcf of recoverable gas resources.”

Zohr in Egypt remains on track to come online this year to complete the seven startups planned.

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