BP plc doubled year/year profits in the third quarter and delivered its strongest results in five years, delivering the oomph to fund the $10.5 billion takeover of BHP’s Lower 48 portfolio with cash versus equity, the CFO said Tuesday.
With quarterly net income at its highest level in five years and strengthening oil and natural gas prices, the London-based supermajor plans to fund the BHP acquisition, set for completion on Wednesday (Oct. 31), with cash.
During a conference call to discuss quarterly results, CFO Brian Gilvary expressed optimism about paying cash for the mega acquisition.
“This quarter’s underlying result was significantly higher than the second quarter in a very similar price environment,” he said. “Since we announced the BHP transaction, oil prices have firmed to levels significantly above the acquisition assumptions.
“While oil prices remain at these levels, we expect to finance the transaction fully using cash. In this event, the $5-6 billion divestment program linked to the transaction will be used to reduce debt. We will also continue our share buyback program to offset dilution from the scrip dividend.”
Besides higher oil prices, lower levels of U.S. natural gas storage capacity “have driven Henry Hub prices close to $3.30/MMBtu for the first time in more than six months,” he said.
Paying for the prized BHP portfolio with cash, versus the original plan to fund it 50-50 via cash and stock “simplifies the transaction, removing the equity issuance and the related dilution and friction costs that would have arisen,” Gilvary said.
The decision is a bet that higher commodity prices will be sustained. Paying cash would move BP “temporarily” above its 20-30% gearing band (debt/equity ratio) in early 2019. Gearing at the end of 3Q2018 was 27.5%.
However, “we would then expect gearing to move back down toward the middle of the band by the end of 2019, in line with the generation of free cash flow and receipt of disposal proceeds,” the CFO said.
Underlying replacement cost profit, similar to U.S. net earnings, more than doubled year/year to $3.8 billion ($1.15/share), with profits 35% higher sequentially. Operating cash flow increased to $6.6 billion, including a working capital build of $700 million.
In the United States, which is BP’s main operating area, quarterly profits climbed year/year to $1.02 billion from $264 million, and from $742 million in 2Q2018. U.S. exploration expenses fell sharply from a year ago to $39 million from $190 million, and sequentially from $77 million.
Reported global oil and gas production was 3.6 million boe/d. Lower 48 production rose to 321 million boe/d from 304 million boe/d and from 312 million boe/d in 2Q2018.
U.S. onshore natural gas production increased to 1.614 Bcf/d from year-ago output of 1.512 Bcf/d and 2Q2018 production of 1.563 Bcf/d.
There’s no doubt that BP feels it’s now in the driver’s seat following eight years of volatility following the 2010 Macondo tragedy in the deepwater Gulf of Mexico. In Macondo’s aftermath, BP stared down thousands of lawsuits and paid out billions in settlements.
Today in terms of liabilities/lawsuits related to Macondo, “we are down to the final series of claims,” Gilvary said. “The vast majority...have now been processed, but there is a process with the Plaintiffs' Steering Committee, the court supervised settlement fund that allows claimants that have been denied to resubmit. And there'll be an either one, two or the third cycle of resubmissions. But we're now in the sort of de minimis.”
Gulf of Mexico oil spill payments in 3Q2018 were $5 million on a post-tax basis.
“This is probably one of the quietest quarters that we've had around Macondo,” Gilvary said. “We are in the final sort of I could say 22 claims, but then there's a recycle effect that takes that number to 200.” It’s down to the “legal game now of whatever is now left on appeal and then we'll fight those appeals” through the U.S. Court of Appeals for the Fifth Circuit, the arbiter of most of the legal action.