5 Important Facts BP's Management Wants Its Investors to Know
Image Source: BP corporate website
It should come to the surprise of no one that BP's quarterly earnings didn't turn any heads on Wall Street. Even without the several billion dollar asset impairments and writedowns it took last quarter, earnings from upstream production declined more than 90%! So the number's weren't great, but BP's management thinks that today's rugged results are hiding some of the brighter things ahead for the company.
Here are five things that management highlighted in its recent conference call that it believes every BP shareholder should know.
1) The post Deepwater Horizon period has begunThis past quarter was a watershed moment for the company because it had settled a vast majority of the cases related to the Deepwater Horizon spill. While $18.7 billion over an 18 year period is a big chunk of change, BP's CEO Bob Dudley believes it does give one benefit for BP's shareholders:
Those last couple of words are extremely important because lack of clarity in regards to the Deepwater Horizon spill has been one of the biggest question marks surrounding BP's stock for years. Now that shareholders know exactly what the company faces in terms of dollar amounts, it gives the company a little more financial wiggle room for future development.
2) Reduced costs without too much sacrifice for the futureWith oil prices in the doldrums, oil companies have a choice to make: Cut spending now to conserve cash and not raise capital, or keep capital spending levels going and fill the funding gaps with debt. Neither one is ideal, really. If you cut spending, you risk not having enough projects in the development pipeline for years down the road. If you keep spending going, you risk blowing up the balance sheet with debt. In the case of BP, management thinks it can have the best of both worlds by forcing some of its suppliers and contractors to bear some of the costs. As Mr. Dudley put it, BP can cut costs without compromising too much of the future thanks to cheaper rates from oil services companies:
Declining offshore rates for BP are critical because a much larger portion of its current and future production is tied to offshore development in places such as the Gulf of Mexico, West Africa, and the North Sea. If the company can get significant savings on contracts for the equipment and services related to the development of these resources, it should help BP navigate today's climate without being left with an empty project quiver several years from now.
3) We believe climate change will significantly impact our business ...Oil and gas companies have historically been some of the largest opponents to the idea of carbon emissions being linked to climate change and the potential harmful effects. And when they have acknowledged the link, it normally is with an "it won't change what we do" sort of response, but according to Mr. Dudley, it's becoming a bigger and bigger component of the company's decision making process.
Now some might see the company's position on efficiency as a cop out on their end since it doesn't really put the onus on oil and gas companies to make any changes to their business models. However, energy efficiency could have a much larger impact on BP's long term business than you might think. Consider this chart:
Source: Exxonmobil corporate presentation
Through anticipated gains in efficiency in the transportation sector, we could reduce global future demand for oil by 70%. A company that is advocating for policies that could wipe out 70% of the growth in its own business isn't as much of a cop out as it seems.
4) ... and we're changing our production portfolio because of itIt's nothing new for BP or some of the other major oil companies to acknowledge carbon emissions' link to climate change, it's just that normally companies don't do much about it because the business of producing oil is still a lucrative one. However, there are some noticeable changes coming for BP's long term production portfolio that are in some ways a reflection of its view on climate change, as Mr. Dudley explains.
Look, we can't expect oil and gas companies to become major players in the alternative energy space. Over the past several years they have tried getting involved in it and have been pretty lousy. However, from a carbon emissions standpoint, natural gas is a significant improvement over oil and coal. BP is starting to recognize this, and a push toward more natural gas production might be a signal that it is actually expecting some of those carbon pricing mechanisms to be in place sooner rather than later.
5) For the company, it all comes down to dividendsAs a stock, BP knows exactly what it is. Investors aren't buying into shares looking for huge revenue or earnings growth, they are looking for a stable company that can consistently churn out extra cash it can give back to shareholders in the form of a dividend. So Mr. Dudley made it eminently clear this past conference call that the dividend was a major priority for management. Here's just one example of that.
BP's current dividend yield of more than 6.5% suggests that a lot of investors are leery of BP's ability to pay that dividend long term through operational cash generation. They have a point, up until last year the company wasn't even able to meet all of its capital spending obligations without raising capital, and that was with $100 oil. However, management believes that within 2 years it will be able to right the ship and generate more than enough cash from operations. So we'll have to wait and see if those cost saving measures it has implemented will be able to make up the difference.
The article 5 Important Facts BP's Management Wants Its Investors to Know originally appeared on Fool.com.
Tyler Crowe owns shares of ExxonMobil. You can follow him at Fool.comor on Twitter@TylerCroweFool.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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