BP Stuns The Market With Its 2Q’17 Results; Likely To Remain At Lower End Of Capex Guidance
Contrary to market expectations, BP Plc. (NYSE:BP), the European integrated energy company, posted a strong set of financial numbers for its June quarter of 2017 on 1st August 2017((BP Announces June Quarter 2017 Results, www.bp.com)). The London-based company’s results exceeded the analyst estimate for both revenue and earnings by a notable margin, driven by solid improvement in its upstream operations and continued growth from its downstream business. In the light of the uncertainty in the commodity markets, BP decided to remain at the lower end of its capital expenditure guidance of $15-$17 billion for 2017. Further, the oil and gas major expects seven of its major projects to be operational by the end of the year, which will not only boost the company’s production capacity but also drive its long term growth.
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Upstream Highlights
- BP’s upstream operations improved significantly in the second quarter, backed by the 10% rise in its production volumes as well as higher price realizations. Further, the company managed to bring down its operating costs by 18% during the quarter. While the lower costs were somewhat offset by high exploration write-offs for its Angola assets, the company posted adjusted operating profits of $710 million in its upstream operations, as opposed to only $29 million in profits in the same quarter of last year.
- Operationally, the company is on track to deliver 800 thousand barrels of oil per day (KBOED) of new production by 2020. Three of the companies major projects have already come online in 2017, while four more are expected to commence operations by the end of the year.
- Further, the oil and gas giant made four gas discoveries in the first half of 2017. These discoveries are located in Egypt (one), Trinidad (two), and offshore Senegal (Yakaar discovery). The company also sanctioned the development of two new major gas projects – ‘R-Series’ in India and Angelin in Trinidad – during the quarter.
Downstream Highlights
- BP’s downstream operations continued to deliver strong results in 2Q’17. The company’s fuels marketing business delivered continued growth supported by the rollout of around 90 new convenience partnership sites and higher premium fuel volumes. In line with the industry trends, the company witnessed higher refining margins and stronger refining commercial optimization, which was partially offset by a higher level of turnaround activity during the quarter. However, due to one time charges, the company’s adjusted downstream earnings dropped slightly from $1.5 billion in 2Q’16 to $1.4 billion in 2Q’17.
- During the June quarter, BP signed a memorandum of understanding with Reliance Industries Limited (RIL) to jointly explore options to develop differentiated retail and aviation fuels, mobility, and advanced low carbon energy businesses in India. Further, the company announced its plans to evaluate the formation and initial public offering (IPO) of a master limited partnership (MLP) to enhance shareholder value and to support its US midstream business.
Financial Highlights
- BP generated operating cash flows of $11.3 billion in the first half of 2017, which resulted in surplus cash flows of $600 million after the capital expenditure and dividend payments. The company continued to maintain its quarterly dividend at 10 cents per ordinary share for the second quarter.
- However, the company’s net debt at the end of the second quarter of 2017 increased to $39.8 billion from $30.9 billion in the year ago quarter, primarily due to the Gulf of Mexico oil spill payments due during the quarter. Consequently, the company’s leverage rose from 25% in 2Q’16 to 29% in 2Q’17. Going forward, BP expects these payments to decline in the remaining part of the year and aims to utilize the proceeds of its divestment program to pare down its debt.
Going Forward
- As mentioned earlier, BP is on track to add more than 1 MBOED of upstream production by 2021. These projects are expected to generate 35% higher cash operating margins and 20% lower development costs in contrast with the company’s base portfolio in 2015. This will allow the company to remain resilient and deliver strong returns, even in a weak price environment.
- According to the downstream marketing and advanced manufacturing strategies laid out by the company in June 2017, the company expects to witness a sustainable underlying earnings of more than $3 billion from its downstream operations by the end of 2021.
BP’s Downstream Projected Growth Trajectory
Source: BP’s Downstream Investor Day, June 2017
- Considering the ongoing volatility in the commodity markets, BP has decided to remain at the lower end of its capital spending guidance of $15-$17 billion in 2017 and beyond. This appears to be a sensible move on part of the company, as most of its peers, such as Chevron, Anadarko, and ConocoPhillips, have pulled back their capital investment budget for the year.
- Further, the company anticipates its divestment program to pick up in the second half of the year, resulting in proceeds in the range of $4.5 to $5.5 billion in 2017. These proceeds are likely to boost the company’s cash flows in the remaining part of the year, since the majority of its Deepwater Horizon oil spill payments (around $4.3 billion) have been made in the first half of 2017.
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