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BP’s ‘Very Gassy’ U.S. Portfolio Centered on Haynesville, Future LNG Exports

BP plc on Tuesday reported its strongest underlying quarterly profit in three years, with first quarter earnings up 71% year/year and 23% sequentially.

The London-based oil major, which by NGI’s tally also is the biggest North American natural gas marketer, delivered 14% growth in underlying production from a year ago. In combination with a stronger price environment, underlying pre-tax profits totaled $3.2 billion, the best result since 3Q2014, when oil prices were $100/bbl-plus.

“With rising output from our new major projects and excellent reliability, upstream production was 9% higher than a year earlier,” Group CEO Bob Dudley said. “Moving through 2018 we’re determined to keep delivering our operational targets and maintaining capital discipline while growing cash flow and returns.

“Over the longer term, our new lower carbon ambitions, including clear targets for our own emissions, will help ensure that all of BP is also focused on advancing the energy transition."

CFO Brian Gilvary on Tuesday led a conference call to discuss the results, noting that underlying production climbed 14% year/year.

Project startups, as well as Gulf of Mexico workovers, were credited for the slight increase in 1Q2018 output, and “we really expect to see that continue on the trend that we’ve seen.”

However, management is “acutely sensitized to any signs of inflation at the moment, but we're not seeing any of that come through” in the contracts. “It’s one of the areas that we focus on just to make sure that as we see these higher prices...We're going to start to see inflation creep back in,” but “that doesn't appear to be the case at the moment across the pieces.”

As the breakeven prices to produce have declined, the Lower 48 “is the one place where we can ramp up and ramp down,” said the CFO. “Of course, it’s also a function of price. Our breakeven economics now are very, very low in terms of cash breakeven. They are certainly close to $1 for some of the wells that we're looking at $1/boe of cash breakeven basis.”

BP was running 12 operated rigs across the U.S. onshore from January through March, with about half in the southern Haynesville Shale, “which has been incredibly productive for us…”

BP long has had a “very gassy portfolio” in the Lower 48, weighted about 85% to gas and 15% to liquids, Gilvary said.

Ramping up more rigs in the gas plays is “really opportunity-driven on a point-forward basis.” The Lower 48 “is the one place where you can ramp up and ramp down.”

LNG Ambitions

During the question and answer session, analysts also were keen for more insight into BP’s liquefied natural gas (LNG) business.

“On LNG, we see it as an integrated equity and marketing business,” Gilvary said. “But we do have an ambition to expand the portfolio to up to 25 million tonnes/annum...That's from both an equity perspective and a merchant LNG...We're taking contracted volumes around the world. We'll continue to move forward on that.”

Last fall BP signed a 20-year liquefaction contract with Freeport LNG, which is underway on the Texas coast; startup has been delayed for the three production units to between 3Q2019 and 2Q2020.

“We have the Freeport option to export gas out in the United States that comes up in the time window over the next 18 months,” Gilvary said. “So we'll continue to ramp that activity up” in the onshore gas plays.

“I think it gives us a huge amount of opportunity. I think you're going to see quite a number of LNG projects come on to market out to 2022,” he said.

BP is looking at “the next big raft of projects...I'm not sure how much gas will ultimately get exported out of the United States, but we still have very strong ambitions in the LNG space. And in fact, actually, we had a good set of results in terms of first quarter in terms of our gas marketing and LNG activity…”

Gas trading is performing “above average,” and “that would mean typically $100 million or more over what will be a typical trading quarter,” Gilvary said. “That came out of North America gas and power. It was as much out of that position and some of the LNG positions that we have, but it was a strong first quarter for them.”

BP also is getting more bang for its buck in the upstream. In 2014, when oil prices were trending above $100/bbl, BP employed about 25,000 people worldwide in the upstream unit. Today, it has about 18,000 people who are able to do more.

Exploiting Technology Through Digitization

“I think what you're now seeing with the technology is we're getting more productive use of time for the people that we have, and we now have the alternatives to redeploy people within the organization on more productive roles, given that they're now getting access to real-time data in any number of different applications, not just in the upstream but in the downstream, in our trading businesses, and across the piece,” Gilvary said.

“The whole world of digitization is moving at such a rate of knots, and the cadre of people that we're now hiring, is showing us how we can exploit that technology and put it to good purpose and good use that ultimately helps enhance revenues...There may be more efficiencies to come in terms of our workforces, but it will really be about how we redeploy people into more productive roles within the company as we use more and more types of technology that are coming through.”

As BP increases its operating cash flow, it expects the organic breakeven for the group to average around $50/bbl on a full dividend basis in 2018, reducing steadily to $35-40/bbl by 2021 “in line with growing free cash flow,” Gilvary said.

“Across our operations we continue to make good progress...Plant reliability in our operations was a record 96% in the first quarter. This helped us deliver an operating efficiency of 86% -- a 2% improvement on our previous best.”

Upstream performance improved with the ramp-up last year of seven major projects. In the downstream business, BP benefited in part from higher Canadian heavy crude oil discounts.

Gilvary credited higher prices to stronger global demand, as well as the decision by the Organization of the Petroleum Exporting Countries (OPEC) and its allies to reduce output through this year.  

“Brent crude averaged $67/bbl in the first quarter of 2018, versus $61/bbl in the fourth quarter of 2017,” said the CFO. “This reflected continued robust global demand growth, building on the 1.7 million b/d growth in 2017, a high level of compliance with the supply cuts targeted by OPEC and participating countries, and geopolitical concerns about possible future supply disruptions.”

Meanwhile, Henry Hub natural gas prices “spiked briefly in January in response to extreme cold weather. The price moderated in February with warmer weather and increased U.S. production, averaging $3.00/MMBtu for the quarter.”

Through 2018, management expects prices to be influenced “by the degree of continued production discipline from OPEC and other participating countries, the pace of U.S. Lower 48 supply growth and global demand strength,” Gilvary said.

Geopolitical Uncertainties

However, “significant uncertainties” remain, including “geopolitical risks and the possibility of further guidance from OPEC,” as commercial stocks from industrialized countries “near their five-year rolling average.”

At the Whiting refinery, a sprawling, 1,400-acre complex near downtown Chicago, BP processed 10% more heavy crude than a year ago as U.S. unconventional output continued to soar.

BP’s first quarter underlying replacement cost profit, similar to U.S. net earnings, increased to $2.6 billion from $1.5 billion a year ago and $2.1 billion in 4Q2017. Compared with a year ago, results benefited from higher liquids and gas realizations.

Operating cash flow increased 22% from a year ago while underlying cost replacement jumped 71%.

Excluding payments related to the Macondo oil spill in 2010, BP’s underlying cash flow was $5.4 billion. Gulf of Mexico spill payments totaled $1.6 billion in 1Q2018, which included a $1.2 billion payment to the U.S. Justice Department under the 2012 settlement agreement.

Net debt at the end of March was $40 billion and gearing was 28.1%, “within our 20-30% band,” Gilvary said. BP also bought back 18 million shares through the quarter, at a cost of $120 million. Organic capital expenditures (capex) totaled $3.5 billion, while proceeds from asset sales amounted to $200 million.

BP expects second quarter upstream production to decline sequentially in part on seasonal turnaround and maintenance activities. However, the downstream unit should see seasonally higher refinery margins and a “narrowing of the discount for North American heavy crude oil,” Gilvary said.

“Our full-year 2018 guidance remains unchanged from what we laid out in February,” he added. “We expect upstream underlying production to be higher than 2017, driven by the continued ramp-up of the 2017 major projects, as well as the six major project start-ups in 2018.”

Organic capex for 2018 is expected to be $15-16 billion, “at the lower end of our medium-term $15-17 billion frame, reflecting the continuing focus on disciplined spend.”

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