BP cuts $10B as oil woes linger

Firm expects cheap crude to last another year

BP is cutting $10 billion from its operations to underscore a dire warning to the oil industry: Crude prices aren’t recovering, they are in retreat. Act accordingly.

The British oil and gas producer outlined a financial overhaul that hinges on its belief that oil will stay cheap for at least another year, a gloomy scenario that would be felt by many in Houston’s economy and especially its expansive oil hub.

BP’s plan calls for billions in capital budget reductions, cost cuts and oil-asset sales next year and beyond, which would mean forfeiting some of its size and production to help restore a global crude market now saturated in oil. Company officials believe the cuts will allow it to keep paying shareholders a dividend and will bring its cash flow in line with costs by 2017 even if crude prices never rise above $60 a barrel.

“The market is now pricing in a much flatter trend in the oil price to 2020 and beyond,” BP CEO Bob Dudley told investors Tuesday. “This reinforces

the need for a business model that can withstand a longer period of lower oil prices, and we’ve been resolved to that for some time.”

BP, which directs its Gulf of Mexico and U.S. shale operations from Houston, presented the first third-quarter earnings report from the world’s largest publicly traded oil producers — a handful of supermajors often described collectively as Big Oil. The rest will report earnings in the next few days.

The industry weathered a tough July-September period as surging crude production from the Organization of the Petroleum Exporting Countries and slowing demand in China and elsewhere broke a spring rally and cut oil prices to six-year lows. If nothing else, the quarter vindicated BP’s pessimism.

“Not everyone shared our view at the time,” Dudley said, recalling speculation earlier this year among many others in the industry that prices would rebound quickly toward previous levels.

U.S. benchmark West Texas Intermediate crude — which traded above $100 a barrel as recently as July of 2014 — sank 78 cents to $43.20 a barrel in Tuesday trading on the New York Mercantile Exchange, its lowest point in nine weeks. Brent, the international standard, declined 73 cents to $46.81 a barrel on the

ICE Futures Europe.

BP’s third-quarter profit fell 48 percent to $1.23 billion compared with the July-September quarter last year, and its revenue declined 41 percent to $55.9 billion.

Profit from its oil-production business, battered by low crude prices, sank 80 percent while its refining unit — which benefits from low prices for the raw material it uses to make fuel — brought in more than twice as much income as the same period last year.

Trimming costs, managers

BP pumped 2.24 million barrels of oil equivalent a day in the third quarter, up 4.4 percent over the year before, as it scooped up five new blocks in the North Sea and three in the Mediterranean Sea to look for oil and gas in Egypt, the site of the oil industry’s biggest discovery this year. An offshore project in Western Australia, in which BP has a 17 percent stake, started producing this month.

In response to the global oil glut, Dudley said, the company will cut its capital expenditures to a range of $17 billion to $19 billion a year through 2017 and it will lop off another $1 billion in planned investments this year, bringing its annual budget to $19 billion.

A year ago, it had budgeted $24

billion to $26 billion for 2015.

BP also will keep shedding costs, continuing its two-year effort to trim layers of management. It has already channeled $3 billion in costs out of the group this year; now, it plans to trim another $3 billion by 2017.

In the third quarter, BP took a $151 million restructuring charge — costs related to layoffs and severance packages – and it anticipates its restructuring charges will total $2.5 billion from the fourth quarter of 2014 to the end of next year.

By the end of this year, BP expects its head count to have declined by 4,000 from 84,500 it had last year. The company didn’t say how many employees would be laid off in 2016.

Since the Deepwater Horizon disaster in 2010 — when a BP well in the Gulf of Mexico blew out and led to 11 worker deaths and a massive oil spill — BP has sold off multibillion-dollar chunks of the company to pay for spill cleanup and legal costs. This year, it is near its goal of selling off $10 billion in assets. But now, BP plans to put another $3 billion to $5 billion in assets on the market next year. After that, it’ll sell about $2 billion to $3 billion a year in assets.

Such deep cuts have consequences. As it recalculated the costs of its major projects, BP decided to defer a portion of the 900,000 new barrels of oil equivalent a day it had previously planned to bring into production by 2020.

The company is still slated to build major projects around the world in Oman, Trinidad, the West Nile Delta, Azerbaijan and elsewhere.

Those projects — half of which are already under construction — are expected to bring up 800,000 new barrels a day by 2020.

About 80 percent of the company’s potential projects could break even with Brent below $60 a barrel, “and we would expect this break-even to move lower as we further take advantage of deflation,” Dudley said.

Curtailing exploration

But BP is spending far more on building projects than it is on searching for new sources of oil and gas. Its exploration spending has slipped to about 10 percent of its upstream budget, and while BP is only one of many international oil firms curtailing exploration, it’s a notable reversal for a company that built itself by beating rivals to complex deep-water fields.

With spending on exploration low, BP’s ability to replace its proven reserves is “going to be weak right now,” Lamar McKay, BP’s upstream chief executive, told investors.

The company is working to get more from existing discoveries, he said, and to develop technologies that might unlock others.

One exception to BP’s deep cuts is its plan to keep more debt on its balance sheet in order to put more financial muscle behind its operations. It had kept its gearing — a measure of debt to equity — around 10 percent to 20 percent after the 2010 Gulf of Mexico oil spill, which had kept it from taking some financial risks for fear that cleanup and legal costs could soar unexpectedly.

But the company’s $20.8 billion settlement earlier this year with the Department of Justice, five Gulf Coast states and local authorities has given the company a clear-eyed view of what it will pay, in $1.1 billion installments, over the next 18 years.

A federal court in New Orleans is set to consider the settlement at a hearing on March 23.

“It achieved something nobody thought was possible: finality over a certain period of time,” said Patrick Juneau, a Louisiana attorney and the administrator of BP’s oil spill claims office.

Juneau was appointed by a federal court as a neutral party in brokering a deal between BP, the federal government and hundreds of government entities.

“I can’t tell you how many meetings we had; we had them in Washington, D.C., in New Orleans. We had one hell of a phone bill,” Juneau said. “But it all moved at lightning speed.”