BP reaches turning point in oil output, safety - CEO
As BP announced its third-quarter financial results on Tuesday, group CEO Bob Dudley put forth more details on BP’s future direction and strategic priorities, saying the company had reached a clear turning point in oil and gas production.
Progress made through 2011 in reshaping and focusing the company is creating a stronger and safer BP, able now to deliver both sustainable growth and higher shareholder returns, the company said.
“The past year has been unprecedented in its challenges; and BP has responded well,” said Dudley. “We have laid firm foundations for the future - in safety, in our organization and in developing new growth opportunities.”
“We have now reached a definite turning point,” he added. “Our operations are regaining momentum and we are facing the future with great confidence. I believe we will build on our strengths to substantially grow operating cash flows, allowing us to directly increase returns to shareholders as well as invest for future growth.”
Third-quarter results
“The financial picture for BP today is very different from a year ago,” said Dudley. “We are today reporting replacement cost profits for the first nine months of this year of $15.9 billion, compared to a $9.5 billion loss for the same period in 2010, which was driven by the $40 billion charges we had taken with respect to Gulf of Mexico spill related costs.”
The reported replacement cost profit for the third quarter of 2011 was $5.1 billion.
On an underlying basis, excluding non-operating items and fair value accounting effects, BP’s replacement cost profit for the third quarter of 2011 was $5.3 billion – down 4% on the same period in 2010 — with the improved environment offset by lower production and higher turnaround and maintenance activity and costs. For the first nine months of 2011, the underlying result was $16.3 billion, compared to $16.2 billion for the same period in 2010.
Turning point
Dudley said that October 2011 had marked a turning point in the company’s oil and gas output.
“As our extended turnaround program moves towards completion we are seeing production return, particularly from Angola, the UK North Sea and the US Gulf of Mexico, where we produce our higher-value barrels,” he said.
While future divestments will impact reported output, Dudley said he is confident that underlying momentum has returned.
Focused investment, managed portfolio
Dudley said that BP will focus its investment on the company’s distinctive strengths, where it has proven capabilities and long experience. These include exploration, where the company intends to double its investment; operations in the deep water; the management of giant fields; and building gas value chains.
It will also continue to develop its competitively strong downstream businesses. The company will continue to build alliances with major resource holders and apply advanced technologies to its upstream activities, it said.
BP will also continue to actively manage its portfolio to create both focus and value. It plans to extend its current divestment program to $45 billion, divesting a further $15 billion in assets by the end of 2013 in addition to the current program of $30 billion. Previously-announced plans to sell two US refineries and associated marketing activities are included in the extended program.
The company will re-invest in quality, higher-growth opportunities, mainly in exploration and production, while divesting low-returning assets, it said.
Growing cash flow
Dudley said he expects this sharper focus, together with new projects coming online in both the upstream and downstream and the completion of Gulf of Mexico Trust Fund payments, to significantly boost BP’s annual operating cash flow. He said he expects cash flow to grow by around 50% by 2014.
This assumes a $100 bbl of oil environment in 2014, compared to an average oil price for the first nine months of 2011 of approximately $112/bbl. Around half of the improvement would be expected to come from ending Trust Fund payments and the balance from operations.
“From 2011 through 2014 we expect to bring 17 material new upstream projects into production,” he said. “The cash margins per barrel on these projects are projected to be double the average of our existing portfolio, significantly boosting our cash flow.”
Increasing returns
Dudley said he expected around half the projected additional cash flow to be used for increased investment in the company’s project inventory and half to be available for other purposes, including increased distributions to shareholders.
“Stronger cash flow from a more focussed BP, together with increased divestment proceeds will allow us to maintain a strong balance sheet while investing in projects for future growth,” Dudley said. “It will also enable us to target higher distributions to shareholders, considering both dividends and share buybacks.
“We expect to review our 2012 distribution plans in February, adjusting them in line with the improving circumstances of the firm.”
Dudley added that BP also intended to provide more detailed financial reporting of significant downstream businesses such as lubricants and petrochemicals from 2012 onwards.
2011 progress
Dudley said he has been encouraged by the significant progress BP has already made in 2011.
“These past 12 months have been our most successful for a decade in gaining new access for exploration - with 67 new exploration licenses in 11 countries - and we have completed major deals to enter both Brazil and India,” Dudley said. “We have also agreed asset sales totaling $26 billion.”
BP’s refining and marketing businesses are on track to deliver record earnings in 2011. “We believe the focused, high-quality nature of our downstream businesses already make them world class, generating significant profit and cash for the group,” Dudley said.
The segment will benefit further when the major upgrade of the Whiting refinery in the US is completed in 2013, he noted.
BP has made good progress in embedding enhanced safety and operational risk management throughout the company’s operations with the introduction of the new Safety & Operational Risk organization, Dudley said.
He also highlighted the new drilling standards that have been introduced for the Gulf of Mexico and globally, that all operations were under a single operating management system, and that most of the 48 major upstream turnarounds were now complete.
Dudley said BP had also reshaped and simplified how it operates.
“We have re-structured our upstream business into three main operating divisions, and have moved to a simpler and more centralized organization that will drive better and more sustainable performance in safety, quality and efficiency,” he said.
Gulf of Mexico
“BP was severely tested by the Deepwater Horizon accident,” said Dudley. “It is now over a year since the well was finally sealed and we have continued to respond with a strong sense of corporate responsibility. I believe we are living up to our commitments in the Gulf; learning, applying and sharing the lessons of the accident; restructuring BP and putting safety and risk management at the absolute heart of our operations. This will further de-risk the firm.”
During 2011, BP has settled all claims related to the Deepwater Horizon accident with Anadarko and MOEX - its co-owners in the MC252 lease - and with Weatherford and is applying the settlement payments totaling $5.1 billion to the Gulf of Mexico Trust Fund.
BP’s payments into the Trust Fund are now expected to be complete by the end of 2012, it said.
BP has begun drilling rig operations once more in the US Gulf of Mexico with three deepwater rigs at work on plugging and abandonment activities and last week received approval for the exploration plan for the Kaskida field.
Conclusion
“This past year has shown me just how much can be achieved when BP aligns and applies itself,” said Dudley. “This company has been steadied, turned around and now, this month, with high-margin assets returning onstream, we have reached a clear turning point. Our plans will concentrate our distinctive talents on high value, advantaged assets and are sustainable through our new structures, process and discipline.”
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