BP Rebuilds Portfolio for Growth

Since the pivotal April 2010 Macondo field disaster in the US Gulf of Mexico, UK major BP has sold assets worldwide for $75bn to settle claims. But it has also acquired assets at low cost to “build a distinctive and balanced portfolio,” it said February 28, as it unveiled its strategy for growth to 2021. Today it has the largest reserves after ExxonMobil and is the largest producer after ExxonMobil and Shell. 

The assets it sold were typically depreciated with high rates of return on capital, so the company is now in a “rebuild” phase, and planning at least a 10% return on average capital employed over the next five years. An analyst on the call found this disappointingly low but, as BP executives said, this reflects its starting position, shorn of the higher-paying assets.

BP is aiming for 5% output growth annually, from today’s 3.3mn boe/day, of which a third comes from Rosneft, in which it owns a 19.75% stake. There are still a lot of efficiencies to be driven into Rosneft, executives said, while praising the company's professionalism.

This year will be a record for the company, as it brings seven new major projects on stream, all under budget and ahead of time and production ramping up from new upstream projects is expected to deliver a material improvement in BP's operating cash flow through the second half of 2017. A further nine projects that are expected to start up through 2018-2021 are already under construction, it said.

Eight months ago it was looking at free cash flow of $7-8bn at a $50/b oil price, whereas now it is looking at free cash flow of $13-$14bn, at a $55/b oil price. It has slowed reservoir decline by 2.5%/year, ahead of the 3%-5% annual decline it had assumed.

CEO Bob Dudley (pictured, below) told analysts: "In six years we have fundamentally reshaped and built a very different BP. We are now stronger and more focused – fully competitive and fit for a fast-changing future.” Energy demand, particularly for gas, will grow, according to its latest World Energy Outlook, and there is a lot of gas to come, from Egypt, Oman, Indonesia and Senegal/Mauritania, among others.

The new upstream projects remain on track to deliver 800,000 boe/d of new production on top of field declines by 2020. On average, the new projects are also expected to have operating cash margins 35% higher than the average of BP's upstream portfolio in 2015.

Some of its existing assets are doing much better than 10% rate of return, such as its US shale gas where the company is bringing down production costs. In some plays, such as its San Juan acreage in the Haynesville, it is producing at just $0.90/mn Btu. The situation is “fundamentally different now from a few years ago,” BP said, defending its position as the biggest gas marketer in the country in sub-$3/’000 ft³ environment.

Also on the horizon are the Senegal/Mauritanian gas reserves discovered by Kosmos, which BP has farmed into, and will operate the LNG business. BP said the gas will have to compete with exports of LNG priced off the Henry Hub. BP is drilling four exploration wells there this year and those will be the biggest drilled anywhere in the world, executives said. It pointed out the cost advantages of floating LNG projects, built in stages, flexibly over time and sitting on barges very near the shore – in distinction, perhaps, to Shell’s giant, much more expensive commitment to build the Prelude FLNG project, whose cost remains a company secret.

Commenting on business in the US, Dudley said the political situation was much more open now: the White House is “very interested” in what BP thinks both as a company and as a part of the industry, he said; “more so than at any times in the last eight years.” He said oil and gas have “certainly got a boost in the US.” As an example he said the Donald Trump-led administration was surprised by the compulsory licence payments regime in the Gulf of Mexico – even high-cost deepwater acreage must see regular payments or risk being forfeited.

(Credit: BP)

BP intends to maintain its existing financial frame throughout the five years to 2021, with organic capital expenditure kept within a range of $15-17bn/year and the target band for gearing remaining at 20-30%.

CFO Brian Gilvary said: "Last year we delivered our targeted $7bn reduction in cash costs a year early, and capital spending was $8.6bn lower than its peak in 2013 – without damaging our growth pipeline… We expect this combination of continued cost discipline with the growing cash flow from our core businesses - and the recent portfolio additions - will steadily drive down the cash balance point of the business. Over the next five years we expect this to fall to around $35-40/barrel for the Group overall."

Key though to its success will be cost discipline. Late last year it abandoned plans for gas production in the Great Australia Bight, and it is not going to proceed further with production off India while the regime remains unfavourable. Projects will have to meet strict criteria. And an analyst doubted if costs could remain this low if oil prices rose once more. "Are we in never-seen-it-before territory?" he asked.

William Powell