Steady capital spend ‘will cut BP’s break-even oil price’
• CEO reassures shareholders on growth and output and says crude price of about $40 a barrel is needed in 2021
BP said it will need a crude price of about $40 a barrel in 2021 to cover spending and dividends, down from $60 in 2017, as CEO Bob Dudley seeks to reassure investors on the oil major’s growth outlook and finances.
The break-even level would fall as BP keeps capital spending at no more than $17bn a year, the London-based company said on Tuesday. The company aims to raise output 5% a year to 2021 and is targeting returns of more than 10%.
Dudley is seeking to return BP to growth after the 2010 Gulf of Mexico oil spill and the market downturn of the past three years shrank the scale of its operations. The CEO must also show investors he will keep spending in check as crude prices remain at half the levels of 2012 and 2013.
“We can see growth ahead right across the group,” Dudley said. “While always maintaining our discipline on costs and capital, BP is getting back to growth — today, over the medium term and over the very long term.”
BP’s shares extended Tuesday’s gains to rise as much as 1.9% to 462.25p in London.
The stock is down 9.4% in 2017 compared with the 20company Stoxx Europe 600 Oil & Gas index’s 3.1% decline.
The company said on February 7 that its break-even oil price would rise to $60 a barrel in 2017 from an earlier assumption of as much as $55 because of the cost of buying oil and naturalgas fields in Egypt, Mauritania and Senegal. That meant BP was moving in the opposite direction to Exxon Mobil and Royal Dutch Shell, which said cash flow already covered spending.
Dudley said the break-even price would steadily drop from this year to $35 to $40 a barrel by 2021.
That guidance and expectations of returns could be optimistic, though the production growth target looked plausible given the pipeline of projects currently under construction, analysts at Raymond James wrote. Despite the scepticism of a balance point at $40, BP had made a strong statement of intent, UBS wrote in a report.
CASH FLOW
The company also saw as much as $14bn of free cash flow from its oil and gas exploration and production business by 2021 at an average oil price of $55, Bernard Looney, the unit’s boss, said in London. That compares with guidance in 2016 of as much as $8bn of cash flow by 2020 at $50 a barrel.
Another $9bn to $10bn of free cash flow would come from refining, marketing and trading oil, BP said.
“It’s good to see them bring the cash break-even guidance that low, even though it is longdated,” said Rohan Murphy, an analyst at Allianz Global Investors. “The jump in upstream free cash flow guidance goes hand in hand with this, but it is good to see it quantified and shows the portfolio is stronger than the market gives credit for.”
BP did balance its books toward the end of 2016, giving the company confidence to make acquisitions but the hunt to secure future supply forced it to push back its cash breakeven target for 2017 as a whole .
The buying spree at the end of 2016 — taking in fields around Africa that are yet to begin production — would result in a cash shortfall this year, chief financial officer Brian Gilvary said in February.
BP was not looking for any big acquisitions, Dudley said.
It planned to start seven projects in 2017 and was working on nine others that could begin from 2018-21, Looney said.
BP sees total output rising by more than 1-million barrels a day by 2021.