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BP Likely to Boost U.S. Investments on Tax Reform Legislation, Says CEO

U.S. tax reform enacted late last year should lead to “enormous” value creation for BP plc, CEO Bob Dudley said Tuesday.

In a wide-ranging conference call with his management team to discuss 2017 and fourth quarter performance, Dudley highlighted the underlying profits recorded during 2017, the most profitable year for the supermajor since commodity prices plunged in late 2014.

BP, long the leading North American natural gas marketer based on NGI’s quarterly surveys, also is one of the top oil and gas investors in the United States. Dudley estimated that in the past decade around $90 billion has been plowed into the country, separate from $65 billion in obligations from the Macondo blowout in the Gulf of Mexico (GOM).

Expect more investments following the passage of the Tax Cuts and Jobs Act, which lowered the corporate tax rate from 35% to 21%.

The tax reform is “an enormous value to business in many ways,” Dudley said. “It's important for us. There's no doubt we'll increase investments.” His comments follow those by ExxonMobil Corp. CEO Darren Woods, who last week said plans are underway to boost U.S. investments by $50 billion in the next five years, in part because of tax reform.

From a business standpoint, tax reform is “quite transformational,” Dudley said. “There will be a lot of capital attracted to the U.S. in my opinion, just speaking from BP's perspective.”

Dudley, a U.S. native, said the regulatory climate in the United States “is suddenly so much easier. It was becoming an avalanche of regulations in every directions. Permitting required sequential federal and state, and now they're in parallel. Decisions are going to be made faster…”

Production gains during 2017 propelled BP to sustain guidance in growing production by 5% to 2021, upstream chief Bernard Looney said.

“In total, from the beginning of 2016 to the end of 2017, we installed more than 500,000 boe/d of production capacity from our major projects, a very significant year of delivery as we marched toward our 2020 guidance of 800,000 boe/d,” Looney said.

“Second, we grew production 12% versus 2016. This was ahead of our plan, with production growth accelerated into 2017. Underlying growth was 8%.”

Two “high-margin oil basins with price leverage” are BP’s holdings in the GOM and in the North Sea. “In our plans right now, the combined production of these two basins will be higher in 2025 than they are today without any new exploration,” he said. “We've identified around 130 operated high-margin wells we expect to drill by 2025.”

For natural gas, the Lower 48 business and Oman Khazzan offer “huge gas resource bases with long steady cash flows...In the Lower 48, we have around 40 Tcf of identified resources, and within this, we have identified around 1,300 wells we can drill in high quality plays with rates of return above our 20% hurdle. We have a further 3,000 wells that sit just below the hurdle rate that we continue to work.

“This gives us the option to grow production from around 300,000 boe/d today to an excess of 400,000 boe/d by 2025, all depending upon investment levels.”

Gas-leveraged opportunities also exist in the Midcontinent and the Greater Green River Basin, along with the “highly economic” Haynesville Shale and San Juan Basin.

“The objective is to discover barrels, which are better than the barrels we have today, as well as to keep our facilities full,” Looney said.

Haynesville: ‘Most Lucrative Gas Play’

Much has been made of the Permian Basin, where BP is not a big player, but management is screening every opportunity, Looney said. A producer doesn’t have to be “liquids-based to generate enormous value.”

For example, BP is finding plenty of value from its onshore gas holdings, he explained.

“In 2015, we had very little acreage in an area called the Bossier or Haynesville Shale, and we identified this opportunity called ‘SoHa,’ South of Haynesville. Over the last two years we have quadrupled our acreage position in this play…”

The SoHa is “possibly the most lucrative gas play in the United States,” Looney said. BP has gone from operating no rigs to now running six in the play.

“The 2017 drilling program generated in excess of 40% rate of return at $3.00/Mcf Henry Hub,” Looney said. “We went from zero to about 35,000 boe/d of production in the space of 18 months and can see that production growing to over 100,000-150,000 boe/d in the next four or five years…”

BP has identified 400 drilling locations in the SoHa, “and probably more than half of the capital in the Lower 48 business going into that play alone because it is so lucrative...So yes, much is made of liquids, and certainly we look at liquids all the time…” But liquids are not the only kind of production to pay dividends.

BP’s decision to carve out the Lower 48 business as a separate entity is paying off, said Looney. The separated business provides a “more independent mindset with a goal to capture acreage, appraise, develop quickly and create enormous value is working in South of Haynesville...And a 40% rate of return is 40% rate of return.”

Seven new project ramp-ups last year helped BP increase upstream production to the highest level since 2010. Including output from its stakes in Russia’s Rosneft, production climbed 10% to 3.6 boe/d. Oil and gas realizations were 25% higher.

Exploration delivered the “most successful year” since 2004, with around 1 billion boe resources discovered.

BP expects to cover its capital expenditures (capex) and pay for the dividend with cash from operations at $50/bbl oil prices this year, said CFO Brian Gilvary. The company is targeting a breakeven oil price of $35-40/bbl by 2021.

Dudley spent a few minutes discussing the transformation underway not only at BP but across the energy spectrum. The challenge is to recognize “it’s not a race to renewables, it’s a race to lower greenhouse gas emissions.

No matter how quickly renewables are embraced, “the world is going to require gas and oil for some decades to come…”

BP also is seeing gains through digital transformation. For example, it co-developed a pad optimization mathematical model with a Silicon Valley start-up, the first time it was applied in the oil and gas industry,” said Looney.

When the model initially was deployed on 180 wells and five pads, emissions fell by 74%, production increased by 20% and costs dropped by 22%.

By using “machine learning” BP also is able to deliver more effective and focused inspection programs, said Looney. The global operations organization last year completed 2,700 separate projects, with saved or mitigated around $330 million and added or protected close to 55,000 boe/d of output.

During the fourth quarter, underlying cost replacement, analogous to U.S. net income, was $2.1 billion, versus $400 million in 4Q2016. However, one-time charges related to the U.S. corporate tax charges and writedowns from higher-than-expected Macondo settlements, wiped out most of the gains, leading to a $583 million quarterly loss.

For 2017, underlying cost replacement was $6.2 billion, versus $2.6 billion in 2016. Operating cash flow in 2017, excluding GOM payments, was $24.1 billion, versus $17.6 billion in 2016. GOM spill payments last year totaled $5.2 billion, down from $6.9 billion in 2016.

Organic capex this year is expected to be $15-16 billion. To 2021, “we do not expect to exceed $17 billion in any one year,” Gilvary said. “We will ensure we remain robust through the downside in the event oil prices were to drop to $50/bbl.”

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