This past quarter, BP (NYSE: BP) looked like it was on the precipice of something big. Not only were earnings starting to look better, but BP is about to enter a rather impressive growth phase as several major projects come on line.
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On the company's most recent conference call, BP CFO Brian Gilvary touched on this major growth phase and how it will impact the bottom line as well as the overall economics. And, of course, no BP discussion would be complete without some discussion of the Macondo oil spill and the ongoing costs. Here are several quotes from the company's most recent conference call that should help give you a better understanding of BP's mind-set headed into the rest of the year.
Oil price projections moving again
BP has been waffling quite a bit lately on how it is planning for the future. Integrated majors typically use some future oil price as a means to develop budgets and value prospective finds. Less than a year ago, the company was looking to achieve a breakeven of $50-$55 per barrel of Brent crude. Then, last quarter, CEO Bod Dudley said that the corporation would be able to "re-balance its financial framework" at $60 a barrel. This past conference call, CFO Brian Gilvary added a few new numbers into the mix.
As noted in February, based on our current planning assumptions, this is consistent with our organic cash balance point reducing steadily to around $35 to $40 per barrel over the period [2017-2021] with the recent portfolio additions adding even more resilience to the portfolio.
If you are a little confused by all these numbers being thrown around, you aren't the only one. The difference here seems to be that, at present, an oil price of $50-$55 per barrel is enough to cover its current capital spending as well as its dividend payments. That $60 a barrel is sufficient to achieve both of these things as well as eliminate the scrip dividend and lower its total debt levels to the desired range of 20%-30% of the capital structure. Finally, that range of $35-$40 per barrel is what breakeven will be several years from now when many of its major capital projects have come on line and spending is lower. That last one is a little harder to believe, though, since the company will likely embark on new spending projects once those under construction come on stream.
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Big cash bump
2017 is slated to be a big year for BP's oil and gas production. By the end of the year, it expects to have seven major capital projects completed and producing. When asked what kind of impact that would have on the company's cash flow, Gilvary was pretty clear that it will lead to a significant bump in operational cash, and it will have an impact on breakeven prices.
In terms of material cash flows, yes, it is in terms of the operating cash. It gets driven off the back of the seven major projects coming on stream this year. And so the way in which the year was always set up was that the operating cash flow would grow through the first, second, third, fourth quarter with the major piece coming through in the fourth quarter. And that's why by the time we get to the end of the year, you see our breakeven economics come down quite significantly.
By material you should assume that number means bigger than $1 billion delta versus where we are in the first quarter by the time we get to the end of the year. It will probably be significantly above that.
Shoring up its Lower 48 operations
For a while now, one of the largest stains on BP's quarterly results has been its U.S. operations, notably its ventures into shale. It wasn't that long ago that the company internally spun off its Lower 48 operations into an independent business that runs within BP to better respond to the fast-paced nature of shale drilling. It hasn't worked out so well thus far. This past quarter, U.S. upstream operations only accounted for 12% of upstream earnings even though it was 30% of total production. When asked what the company's capital plans were for the U.S., here's what Gilvary had to say.
In terms of U.S. onshore, we today have – I think we're now back up to about 12 rigs in the first quarter of 2017, versus 5 in the fourth quarter. You'll see that ramp-up as the team experiments within each of the basins. But we're now running 12 rigs.
Cash breakeven on a full free cash basis has now come down almost half from the full year 2015 to where we are in the first quarter of 2017, down around $2.60 [per thousand cubic feet of gas] or that sort of level, in terms of cash breakeven.
The thing that should be a little concerning here is that the company is still doing experimental drilling to determine the best path forward for shale. Compare that with ExxonMobil and Chevron, which both have plans to grow significantly in the Permian Basin over the next few years. Part of BP's slower response is that the company's shale assets are much more related to gas -- hence the breakeven results given in natural gas prices. Still, BP is going to have to figure out how to turn these operations into higher rates of return, because they aren't getting it done today.
Cutting even more?
At the top of the conference call, Gilvary said that BP's capital spending would likely be in the $15 billion to $16 billion range, which was the lower end of its initial projections. Those plans were contingent, of course, on oil prices in a certain range. When asked if there was room to cut spending or if this was about as low as it gets for the year, Gilvary said there was still some wiggle room.
[W]e could take another $1 billion out if we had to at though – in that scenario. But all options are open to us at that point in terms of flexibility within the financial frame and what else we need to look at. But I think it's an unlikely scenario from where we are today. As you see demand grow, we expect crude stocks to come back into line. Actually, crude stocks will probably still be at the top end of their historic range by the end of this year.
So I think something around $50, $55 a barrel seems a reasonable assumption on a point forward basis. If it drops below $50, we have further flexibility in terms of how we manage that.
That last part is important because oil prices have dipped below that $50-a-barrel mark. Don't be surprised if we get a lower capital budget projection in the coming months.
Homestretch on Macondo
It seems that the Macondo well spill is the issue that just won't go away. While the company did settle with the U.S. government, which will involve annual payments for more than a decade, the company still has some outstanding claims from businesses that claimed the spill impacted their operations. These led to some large spill costs this year, but Gilvary noted that almost all claims have now been processed and that we can expect outlays related to the Macondo spill will decline soon.
Of the 149,000 [claims], we're down to about 4,000, of which 3,000 are recycled claims that at one point have been rejected and have come back into the system through the process that's allowed. So I think we're down to less than 1,000 claims now in terms of closing that process out going forward – in terms of less than 1,000 claims that we haven't yet had line of sight of. So I think we're now finally into the tail around business economic loss claims.
And in terms of Macondo – and therefore being able to quantify and price up what that looks like on a quarterly basis, we're much closer to now.
Management expects that total costs for the Macondo in 2017 will be $4.5 billion to $5.5 billion depending on these claims. In 2018, costs will drop to $2 billion in 2019, and then down to $1 billion per year for several years starting in 2019.
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