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BP's Corporate Revamp Yields $1B in Savings

BP plc posted a double-digit decline in quarterly profits from a year ago, but natural gas and oil production was up, and a corporatewide operational restructuring yielded $1 billion in cost savings, the company said last week.

Although profits were down 58.9% from 1Q2008, the oil and gas production giant's net results easily beat Wall Street analysts' expectations following strong performance in exploration and production (E&P) and its refining units.

Still, the economic challenges are daunting, said CEO Tony Hayward.

"Oil prices are expected to remain low, and our customers are facing tough business conditions," Hayward said. "We need rapidly to bring our costs to a level that is compatible with a $50/bbl world...We are making good progress.

"Thanks to our continued focus on simplification and efficiency, cash costs in the first quarter of 2009 were more than $1 billion lower than in 1Q2008," said Hayward. BP's unit production costs dropped 11%.

CFO Byron Grote, who anchored a conference call with energy analysts last Tuesday, explained that the $1 billion in cost savings that BP achieved in 1Q2009 is part of the result of the company's revamped corporate structure, which it undertook beginning in late 2007 (see NGI, Oct. 15, 2007).

About 30% of the quarterly cost savings were driven by the foreign exchange rate, said Grote, who noted that the U.S. dollar has "declined substantially" from 1Q2008. Another 30% was attributed to restoration and repair costs that were completed at various facilities -- including in Texas City, TX, and in Alaska.

"Forty percent is from our restructuring and simplification efforts and our improved efficiency efforts and our focus on third-party costs," said Grote. "It's a whole mix of initiatives that we are proceeding with." And the cost cutting is continuing, he said.

"I suspect we'll see a bit more over the course of 2009," said Grote. "We are delighted with what we saw in the first quarter, and much of it is sustainable. We expect to do much better than we originally outlined."

To adjust for sustained lower commodity prices and falling capital costs, BP once again reset its capital expenditures (capex) lower for 2009. The major now expects to spend less than $20 billion. In March the company had said its capex would be $20-21 billion this year, which was below the $22.66 billion spent in 2008 (see NGI, March 9).

BP's clean replacement cost net profit, which strips out inventory gains or losses and exceptional items, totaled $2.58 billion in 1Q2009, which was 64% lower than the $6.24 billion earned in 1Q2008. Total revenue fell almost 47% from a year ago to $48.1 billion.

In the United States, BP's natural gas production in the first three months of 2009 rose to 2.34 Bcf/d from 2.15 Bcf/d a year ago, and it was higher sequentially from 4Q2008's output of 2.24 Bcf/d. Globally, total oil and gas output in the period reached 4.016 million boe/d, up 2.6% from a year ago. BP credited the start-up of the 300,000 boe/d Thunder Horse Field in the deepwater Gulf of Mexico for some of the gains.

BP's realized gas prices for 1Q2009 were on average $3.63/Mcf; total hydrocarbon prices were on average $31.40/boe.

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