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BP, like all of its large oil and gas peers, has been under a lot of pressure from Wall Street to get its spending habits under control. The rapid decline in oil prices over the past two years has left them dipping into the debt markets and selling off large chunks of assets to meet the funding needs of their large development projects.
As BP wraps up several of those projects, management is making a hard push to close the funding gap and get back to both profits and free cash flow, and these recent quotes from BP CFO Brian Gilvary explain how the company plans to do it.
Reducing capital spending even more than before
BP gained a very valuable lessonfrom the Macondo spill in 2010. With so much cash going to pay for the spill, the company needed to learn how to stretch its capital spending budget as much as possible by focusing on its highest-return projects. That lesson is actually paying off a bit as of late, because BP is now using that tight-fisted approach to capital spending as a way to deal with low oil prices. According to CFO Brian Givary, the company is cutting back on spending even more than originally anticipated:
Big cost cuts
On top of the big cuts to spending on new projects, the company is also using this time of low oil prices to drastically lower its operating budget. According to Gilvary:
Cutting $7 billion out of its operating costs will go a long way toward restoring profitability at BP, but those cost-cutting efforts need to be sustained over a couple of years. Hopefully that will be a lesson that will last longer past other major price drops.
Getting closer to meeting cash needs
The reason the company is going through all of these massive cost and capital cuts is because it has one major priority: Protect its dividend payment to shareholders. After all, for a large company in a cyclical industry like BP is in oil & gas, a constant dividend payment is one of the core parts of the investment thesis. Thanks to these cost-cutting measures, Gilvary notes the company is lowering its cash breakeven cost per barrel of oil:
Getting into that $50 to $55 a barrel range would be rather impressive considering that the company's breakeven was well above $70 just a few years ago -- then again, most thought this was fine when oil was consistently above $100 a barrel. Investors should keep an eye on this breakeven number and where it goes from here. In the short term, it would be handy if BP could lower it a little more to come in line with the market. Longer term, we don't want to see it tick up, regardless of what oil prices do.
Some growth left in the tank
For a long-term investor, a big concern is that the decline in capital spending today will result in a lack of growth. Or even worse, a lack of new production to offset natural production decline. According to Gilvary, though, the company still has a lot of room to grow profitable production into the next decade:
The real big one to watch here is the Shah Deniz project. This massive natural gas field in the Caspian Sea is one of those megaprojects that has stymied companies in recent years -- think the cost overruns at ExxonMobil & Royal Dutch Shell's Kashagan project and Chevron's Gorgon LNG facility. It should bring on lots of profitable production, but it needs to keep it on time and on budget.
The other question investors may want to ask, though, is whether these cost cuts will catch up to the company beyond these projects.
No big purchases on the horizon
As oil and gas prices have fallen over the past two years, Wall Street has clamored for Big Oil companies to make some big acquisitions while stock prices are cheap. So far, though, the only one to pull the trigger on a major deal has been Shell with the $52 billion acquisition of BG Group. When asked whether BP sees any potential to make an acquisition, Gilvary had this response:
Basically, he's saying, "no large deal has blown us away yet and we're focused on other stuff, but we'll keep and ear open." This is pretty much the same line execs at ExxonMobil and Chevron have been saying for a while as well.
Part of what they are saying could be true, and no deal out there today looks like a huge steal, but you also have to take into account that the currency each company would use for a deal -- likely shares of their companies -- aren't exactly selling for a premium right now and would potentiallylead to some unnecessary dilution. Perhaps once these companies get their cash-flow statements cleaned up,we might hear a few more whispers on the merger front. For now, though, the rumor mill will remain rather quiet.
The article 5 Things BP's Management Want You 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 owns shares of ExxonMobil. The Motley Fool recommends Chevron. 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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