Last month BP brought in its big guns to give a presentation to highlight the company’s strategy going forward amid growing concerns among its investors for the company’s future. There is a growing impatience to get the share price back to its value prior to the pre Deep Water Horizon incident, when BP almost lost 55% of its share price value and investors believe that they have given BP ample time to recover it.
The presentation included the usual talk about streamlining the organisation by cutting capital and cash costs, managing growth going forward through carefully selected projects and managing investments and partnerships (such as the 10% stake in ADCO, 19.75% stake in the Russian Oil Giant, Rosneft).
There were also attempts to ease investors' concerns by saying that it will generate strong levels of free cash flows by 2021 driven by growth in its upstream and downstream businesses.
I will focus on two particular areas and then try to highlight some of the issues.
Seven start-ups in 2017; $15-17 bln per year organic capital expenditure to 2021.
BP said that it expects to add 1 mln bbl/d of new oil equivalent production by 2021 to its 2016 value, based on the back of six projects that came online last year, seven projects that are expected to start up in 2017 and nine projects which will be placed into service in the subsequent years.
It said it aims to generate free cash flows of $13-$14 bln in 2021, assuming a $55/ bbl price environment, from its upstream business and another $9-$10 from its downstream business. They hope to achieve this with the increased higher margin production, coupled with operational efficiencies.
They also increased the cash flow breakeven price to $60 a barrel from their previous estimate of $55/bbl; this was due to increased spending in 2017 on capital investment with CFO Brian Gilvary commenting “this increase in capital has a near term “technical” effect of raising our forecast organic cash rebalance point to around $60 per barrel by end 2017 before reducing steadily thereafter”.
With crude oil just trading at $48-$49/bbl, these projections present a huge problem; the oil giant currently doesn’t generate enough cash to pay for its generous dividend policy. What’s worse is that BP now needs the oil price to be around $60 a barrel in order for it to balance organic cash flows. Additionally, there is the issue of liabilities associated with the Deep Water Horizon accident, which is still ongoing and BP estimate that to be in the range of $4.5-5.5 bln.
In the current scenario, with another Shale and OPEC price war on the horizon, it doesn’t seem like that we are going to see the stability in oil prices as predicted last year after the OPEC production cuts, and the Saudi Oil ministers statements- “We will not bear the burden of free riders,” and “Saudi Arabia will not allow itself to be used by others. My colleagues have heard that privately, and now I’m saying it publicly.” do not induce much confidence. Last week saw the price gains made after the production cuts being completely wiped out on the back of growing inventories in the US and rising rig counts.
Last week, we also heard rumors of Exxon Mobil getting in touch with major BP stakeholders for a takeover. Although personally I do not see this happening, and I am basing my opinion on the political factors than financial reasons, it does show that not only the investors but other majors also realize BP’s precarious position and sense an opportunity.