Oil and gas producers understandably do not like lower prices, with the attendant hit on profits and consequent investment cuts, project delays and the lay-off of skilled staff who are difficult to recruit in better times.
And even integrated companies that benefit from the flipside of the coin — stronger refining margins mitigating weakness upstream— are only partially shielded.
BP saw its third-quarter profit almost halved this year compared with the same period of 2014, with oil prices around half of where they peaked last year. The major is further cutting its project investments and operating expenses and expanding its restructuring drive — likely meaning more job cuts —promoting the consensus view that oil prices will stay lower for longer.
But BP is feeling much more chipper right now than some of its peers, and definitely more so than it did even a few months ago.
“Probably the big thing that we are starting to see now is that we can again plan the company for the longer term,” chief executive Bob Dudley says. “Having progressed the Deepwater Horizon spill agreements in principle is actually a big thing for shareholders.”
The 2010 US Gulf of Mexico crude spill has prompted the company to divest some $50bn over the past five years to help meet penalty payments resulting from the incident. Numerous spill-related uncertainties also stopped it from setting any ambitious operational targets — at least publicly.
Things look different following BP’s 2 July agreement in principle to settle US federal and state spill-related claims. The firm now aims to cover its capital expenditure and dividend from operating cash flows alone by 2017 at a $60/bl price for benchmark Brent crude. This excludes the spill payments, but even these are manageable, as they equate to roughly $1bn/yr over the next 18 years.
“Any commitments associated with Deepwater Horizon settlements will come from ongoing divestment proceeds, and we have said there is $2bn-3bn of churn going forward, so they will be accommodated by that,” BP chief financial officer Brian Gilvary says.
BP’s plan to rebalance sources and cash uses in 2017 at $60/bl, and further cut capital and operating spend, is not unique. It is in line with what some other companies — including Total and Spain’s Repsol — have already said.
But while Repsol has struggled to convince many investors of its ability to deliver on its updated strategy, BP’s new plan was met with enthusiasm. This is partly because the company’s cash costs have already fallen by $3bn on the year this year, making its ambition to see them $6bn lower in 2017 compared with 2014 realistic.
And its post-spill experience — making itself leaner and reducing costs — has made it better able to weather the current lower oil price environment.
BP’s cost-cutting plan “does not necessarily reflect lower activity levels, but more of a greater focus on simplification, efficiencies and standardisation across all business units,” UK bank Barclays says. “It is this disciplined approach to investment and costs that should ultimately enable BP to balance the equation of cash sources and uses to sustain the current dividend and potentially resume growth in distributions to shareholders post-2017.”
Investment bank UBS called BP’s new plan a “strong, refreshed strategic response to difficult times”, echoing the sentiment of many other analysts.
Despite all the optimism, the company seems to recognise that there is no room for complacency and that a lot still needs to be done. When asked whether 2017 will represent the perfect BP from a cost perspective or if this is still a multi-year process, Dudley replied: “I am not sure there is a perfect BP.”
But its future certainly looks brighter than it did a year ago.