If energy is turning into a game of shrink to survive, BP is ahead of its rivals. The tens of billions of dollars in disposals — including rigs, platforms and pipelines — that followed the disastrous Gulf of Mexico oil spill in 2010 have reshaped the oil and gas giant.
Its “value over volume” mantra, pursued relentlessly by chief executive Bob Dudley, has become a byword for the majors’ efforts to curb costs, strengthen balance sheets and position themselves for a tougher, leaner world of lower oil prices.
So much so, that even as the company moves to cut costs further in the face of a brutal 40 per cent slide in crude prices since June, a more profound question is being asked of BP. Sure, investors can see the benefits of capital discipline, but where are the discoveries that will power growth and keep it firmly in the super major bracket?
The purpose of Wednesday’s investor day was therefore twofold. First, to set out plans for additional spending cuts and, second, to tackle the notion that, as one analyst says, BP has shrunk so much it “has an identity crisis in terms of what it wants to be”.
The scale of this downsizing has been huge. Since the Deepwater Horizon blowout, BP has sold more than $43bn of assets, including over half its pipelines, 35 per cent of its wells, and 12 per cent of reserves. Production — excluding Russia — has fallen nearly 30 per cent since 2009, while upstream headcount has risen 13 per cent, in part to address safety issues.
At BP’s head office in London’s St James’s Square, the view is staff numbers now need to fall. The group will incur a charge of about $1bn over five quarters as it sheds backroom staff and layers of management no longer needed to run a pared back global business.
Lamar McKay, head of BP’s upstream operations, also signalled additional cuts next year to capital expenditure, highlighting how reduced budgets for new projects are expected to be a primary response by oil majors to falling crude prices.
Brent crude at below $65 a barrel will put pressure on cash flow, and therefore raise questions over whether the majors can maintain the stable dividend payouts for which they are so valued by investors.
Among its Europe-based competitors, BP’s cash flow prospects do not look the brightest. Even Deutsche Bank analysts, bullish on the company, see annual growth in operating cash flow from 2014 to 2017 of 5.3 per cent, versus 7.3 per cent for Italy’s Eni and 12.8 per cent for France’s Total.
Hence the question over where future growth will come from at BP. Mr McKay pointed to the potential for over 900,000 barrels of oil equivalent a day of net new production by 2020. Half of this output was under construction and he expected the remainder, including a delayed extension to BP’s Mad Dog field in the Gulf of Mexico, to begin by 2017 or sooner.
But there was a caveat. The list of projects could change “as we selectively progress only those projects that best fit our portfolio”, said Mr McMcKay.
Bringing online new projects in the Gulf of Mexico, including an expansion of BP’s Thunder Horse field, and Clair Ridge in the North Sea will be essential if the group is to finally move clear of more than $40bn in post-Macondo provisions.
There is still considerable uncertainty over the final Macondo bill. The company’s hopes of limiting the cost of compensation for the 2010 spill were dealt a blow this week by the US Supreme Court, which refused to hear the case over what BP described as unjustified payments.
But analysts also argue BP’s position in the Gulf of Mexico, a high-margin region, and its expertise in deepwater drilling, leave it well placed to weather the slide in oil prices.
“It has a big deepwater resource base. This is complex stuff state oil companies aren’t very good at and they can earn returns of 15 per cent plus on capital employed. If the industry can pull off the standardisation and simplification agenda, it should work,” says one institutional shareholder. That, it seems, is Mr Dudley’s plan. – reported http://www.ft.com.
