BP Plc (BP) Q2 2016 Earnings Call

posted in: Earnings Call, Notes | 0

Robert W. Dudley, Group CEO

Strong oil global demand; Stable oil production expected by year end

“As we expected, growth in global oil demand remains strong and we have seen some slowing in global supply growth stemming from supply disruptions, partially offset by the continued increase in Iranian production. In the United States, production continued to decline, and we anticipate a further drop in the third quarter. But with producers slowly adding back rigs, production should stabilize by year end.”

In oil markets, near term rebalancing expected while long term fundamentals are robust

“While some of the factors that have recently supported oil prices may only be temporary, we see the overall fundamentals bringing the market into balance during the second half of this year. Over the last quarter, we have seen oil prices strengthen in anticipation of this rebalancing, with some weakening primarily due to the strong dollar in the last week or so. The longer-term fundamentals for the industry also remain robust.”

High oil inventories are holding back further price increases

“For the time being, oil inventories remain high, well above their five-year average, shown in the green band, and these inventories could still hold back further increases in oil prices for a while yet. So the forward curve has flattened, although it still remains positive. Markets also remain cautious as they await more clarity around the impact of Brexit on oil demand.”

Strong positions upstream and strong presence downstream underpin good prospects for BP going forward

“Our upstream has strong incumbent positions in many of the world’s top basins, with growth in the near term to 2020 and beyond that to 2030. And that’s without the need for a large acquisition, as some have suggested. In our downstream, we have a strong and focused footprint, including advantaged manufacturing assets and an orientation to growth markets with high returns.”

But they still are on the lookout for opportunities for growth

“So we really like the portfolio we have, but we’re also looking for opportunities to take advantage of the environment to deepen in assets we see as attractive. And we continue to look for creative repositioning opportunities.”

While exercising great fiscal discipline

“So making the most of our strong portfolio is important, but we also know we must stay very focused on capital and cost discipline, even as oil prices start to strengthen. It’s about using our scarce capital wisely to preserve our growth objectives while making sure that all the changes we make now are sustainable for the future.”

The business has been resilient in the face of the tough H1 environment

“We’ve made a lot of progress so far in 2016. As predicted, the first half environment has been challenging. But as we look through the seasonal fluctuations in quarterly earnings, our business is proving resilient, and this is even before we fully complete our cost rebasing, which will take us into 2017.”

The deepwater Horizon accident scarred them but they are wiser having picked up invaluable lessons

“Significantly, following the substantial progress we have made in resolving outstanding claims arising from the Deepwater Horizon accident, our results today incorporate what we believe is a reliable estimate for all the remaining material liabilities to BP. This brings six years of managing the aftermath of the accident towards closure. We can now draw a line under it. It’s been a tough period for us, but it has reshaped how we think and how we operate, and it has made us more disciplined. In short, it has made us a better company. We will always be mindful of what we’ve learned, but we are now able to give full attention to our future.”

The future looks challenging but they have repositioned the business for it.

“So we expect 2016 to remain challenging, but we are starting to see a much stronger outlook for the group. Near term, our balance sheet remains robust to deal with uncertainties. Looking further out, as oil markets rebalance, we expect to see more support for oil prices, but we are not relying on this. Our confidence comes from being firmly down the path of transforming our business to compete whatever the future holds.”

On how they will deliver upstream growth going forward

We expect to deliver growth in four ways, first, from growth in and around our existing fields through continued infield drilling, the next phases of existing major projects, and from new projects that progress to FID. This activity is very competitive versus our existing base.

In sum

“But just to sum up, we’re making steady headway in what remains a tough environment. We’re sticking to our financial frame, and this is putting us on track to rebalance organic sources and uses of cash by 2017 at $50 to $55 per barrel. This will allow us to sustain our dividend while still maintaining the flexibility to grow.”

Brian Gilvary, Group CFO & Executive Director

They expect prices to firm up in H2 2016

“Although prices remain weak, the combination of declining production and increases in gas-fired power generation have helped to limit storage overhang and should continue to support some firming in price over the second half of the year.”

Expect disciplined investment and cash distributions should rebalancing in oil prices occur

“Our ultimate aim over time is to sustain a position where operating cash flow from our business covers capital expenditure and the dividend…If the price environment improves, we will look to ensure the right balance between disciplined investment for even stronger growth and growing distributions to shareholders over the longer term.”

Bernard Looney, CEO Upstream Division

´Medium-for-longer´oil prices necessitate the industry to consider co-ordinated cost reduction

“I would say that I think the industry as a whole needs to continue to work together to lower the total cost of doing business in our industry. And rates is an element of that, an important element, but a far more important element is looking at the entirety of the pie and saying what we can do to drive the cost structure down for what I think one of those service company’s CEOs described as a medium-for-longer price environment.”

Cost cutting will continue

“…we expect to continue to drive the cost base of the business down. We’re top quartile in operating costs today. We intend to continue to push and to drive that further.”

They are ramping up production with higher margins on the way

“we’re going to bring on the 800,000 barrels a day of production between now and 2020. The projects are 70% on average complete. They are on average ahead of schedule and ahead of cost, and they bring with them margins that are on average 35% higher than today’s equivalent or the 2015 equivalent at $50.”