Confidence or wishful thinking?
BP Plc (BP) Tuesday announced a new round of asset sales and investment cuts as it laid out its latest plan for surviving a world of lower crude prices.
The British oil major said it would look to raise another $3 billion to $5 billion through asset sales (in addition to the $10 billion already announced for this year) and said it expects to cut capital expenditure to between $17 billion and $19 billion a year through 2017–down by around a quarter from the $25 billion it had expected a year ago, when crude prices were still over $100 a barrel.
The cuts are part of a plan to ‘balance cash flows by 2017’, allowing it to avoid cutting its dividend. Given that BP and Royal Dutch Shell (RDSA) account for about 20% of all dividend income at U.K. pensions, according to some estimates, BP’s dividend tends to be more closely watched than most.
The company’s shares got a modest boost in early trading from the announcement, which banished fears that the payout would be cut to conserve capital. They were also helped by the fact that the company’s bottom line, what it calls ‘replacement cost profit’, fell ‘only’ 40% from a year earlier to $1.8 billion–less than had been expected.
However, they gave up some of their gains later, due in part to the fact that BP’s assumptions about price levels still look, if not heroic, then at least a little ambitious right now. The Brent blend benchmark that BP uses hasn’t traded above $60/bbl since June, and is currently stuck below $48/bbl. That means that BP needs prices to rise by over 25% in the next year to achieve the ‘balanced’ cash flow it’s targeting (i.e., a state where operating cash flow can pay for investment needs and at least an unchanged dividend).
And this has to happen while the world economy is slowing and while Middle East producers like Iraq, Saudi Arabia and, if sanctions are eased, Iran are still pumping like crazy to defend market share. The International Energy Agency reckons the global oil market is likely to stay oversupplied through 2016.
At least BP can take comfort from the fact that it has now settled all outstanding federal and state claims for the Deepwater Horizon disaster, bringing the total cost of the fatal 2010 spill to $55 billion. But it’s still a long way from being on a stable footing.
