BP plc CEO Bob Dudley said last week the company has reached an “operational turning point.”
The oil major, whose current market capitalization approaches $130 billion, has taken it on the chin in the past year, losing about $40 billion of its value following the April 2010 Macondo well blowout in the Gulf of Mexico (GOM). However, the company has taken its medicine and ready to play again, Dudley said during a conference call with investors to discuss the company’s third quarter performance. Uncertainties still face BP because of the GOM spill, but the CEO said confidence has returned.
“It does feel like and is obvious to us that October 2011 is a turning point for the company,” Dudley said. “We face some uncertainties…and it’s not back to business as usual. We are a fundamentally different company. If you spend time with the management team, with our employees in Glasgow [Scotland], in Houston, you will feel that.”
Earlier this year Dudley had said the company would “get off the volume treadmill and rather than volumes, talk about value,” he reminded investors. 2011 was predicted to be a “year of recovery and consolidation” (see NGI, Feb. 2). The company is delivering on those promises.
“The year of stabilization is over,” said the CEO. “Expect to see a period of multiple milestones over the next three years.”
The London-based oil major reported lower underlying quarterly profits in 3Q2011 from a year ago despite high oil prices because of production losses related to divestments. However, replacement cost net profit, which strips out unrealized gains and losses related to changes in the value of fuel inventories, was $5.14 billion in 3Q2011, compared with $1.85 billion in the year-ago period. In 3Q2010 the company took a huge charge related to the GOM spill.
Production in the quarter was down 12% year/year to 3.3 million boe mostly because of divestments but also because of the continuing impact from the GOM drilling moratorium. Following the GOM disaster BP also had ramped up turnarounds, which involves taking offshore platforms out of operation for maintenance work.
“These results really reflect the decisions we made in January to take down our higher margin assets for maintenance work,” said Dudley. “During the month of October you can feel the operational turning point as many of those high-margin fields come back on stream.”
The pace is expected to quicken as the company sells off another $15 billion worth of properties by the end of 2013, up from an original target of $30 billion. The original sales target was to help fund a $20 billion trust fund that was set up for the GOM and Gulf Coast communities. BP should complete funding the trust by the end of 2012. It’s also sold about $26 billion of the targeted $30 billion in divestments. The additional $15 billion of divestments will be worldwide, but there was no detail on where the properties are. Most of the targeted assets for sale are mature pieces of the portfolio, Dudley explained.
The goal for operational cash flow is to be up about 50% in 2014 from 2011 numbers, which would enable the company to not only increase capital expenditures, but also restart a share buyback program and increase dividends. BP is assuming an oil price of $100/bbl in 2014, compared with an average oil price for the first nine months of 2011 of about $112.
“We realize there will be some volatility but when you look at the rapidly increasing demand, we think this is not unreasonable,” Dudley said.
Safety and risk management “will be at the absolute heart of everything we do. And the United States is one of the keys to BP’s future.” The company, which remains the biggest producer in the GOM, is closer to returning to deepwater drilling after a new exploration plan for the Kaskida prospect was given final approval by U.S. regulators last week (see related story).
BP has three drilling rigs now operating in the U.S. offshore that are doing plugging and abandonment activities. If the Kaskida exploration plan wins final approval, which Dudley said he expected “soon,” a fourth rig could be spudding an appraisal well at the prospect by the end of the year.
“We hope to have five deepwater rigs in 2012, again, subject to necessary permit approvals, which would increase to eight by the end of the year. This will create a significant number of jobs at BP and in the U.S., including jobs for contractors and suppliers and indirect jobs.”
Asked to what extent BP’s GOM production had fallen since 2009, the BP chief said normal decline rates for characteristic deepwater wells are 15-20%. When BP “brought production down” in 2010 “we were producing annually 250,000 b/d-plus. We expect in 2012 we’ll be relatively flat because of the decline rates as we ramp activity back up. We don’t expect to get assets right back to where we were in 2009. What we need is to get back in to do basic recompletion work; there’s a big turnaround [planned] for the Atlantis assets, for example.
“But these are very high-margin barrels. We can sustain the decline rate and level it out as we continue on with some new projects in 2012 and 2013. The Gulf of Mexico is a very important province for BP going forward.”
Dudley brushed off talk that BP might split off its exploration unit to create more value for shareholders, as Marathon Oil Co. has done and ConocoPhillips is planning to do (see related story).
“Separating the company for the sake of it isn’t the right thing,” Dudley told an analyst. “We’re going to be a company that plays to our strengths. We’re good at exploration, good at finding oil and gas, and we’re going to double that. We will also reduce our footprint around the world.”
The company still is working to “rebuild confidence in the company and we have firm plans to make that happen…We’ve increased some costs and reduced some volumes but these were short-term effects to lay the foundation for the future…” Future divestments will impact reported numbers in the short-term but “momentum is returning. And there’s more to come.”
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