Balancing the financial frame
"We continue to make good progress in adapting to the challenging price and margin environment. We remain on track to rebalance organic cash flows next year at $50 to $55 a barrel, underpinned by continued strong operating reliability and momentum in resetting costs and capital spending."Brian Gilvary, chief financial officer
Oil price environment
Oil market: moving back to balance
Brent oil price (¹)
(1) Source: Platts 31 October 2016
Brent oil price (2)
(2) Source: Wood Mackenzie 1 September 2016
Forward prices for Brent continue to point to a modest upward trajectory. The physical market appears to have moved broadly into balance, with the amount of oil produced each day broadly in line with daily consumption. Nevertheless, oil inventories are at record levels and will still take some time to reduce. Looking ahead, we expect inventories to decline gradually next year, supported by continued demand growth and sustained weakness in non-OPEC supply.
Focus on long term value growth for shareholders
Optimising the porfolio in a low oil price environment
Value over volume
Our financial framework is designed to grow long-term value for shareholders while maintaining the financial health and liquidity of the Group. At its simplest we have prioritised value over volume and will continue to do so on an ongoing basis.
Disciplined and timely capital allocation
We drive returns through disciplined investment into the best projects. In the current environment we have an added imperative to make very careful judgements about how we use our scarce capital. We have to balance the pace of investment to capture maximum deflation while ensuring we maintain safe operations and preserve future growth.
Selective asset acquisition and divestment
We believe getting this right is strongly linked to making the right decisions about our portfolio. We look to divest assets which no longer fit with our strategy and deepen in assets which add the most value.
Continued capital and cost discipline
Continuing to make strong progress on resetting the capital and cash cost base of the group
We expect capital expenditure in relation to the current portfolio to be around $16 billion in 2016. In 2017 we continue to expect spending to be between $15-17 billion, but leaning more towards the lower end of this range as we continue to improve efficiency. This would represent a 30-40% drop in capital expenditure by 2017 compared to the peak levels in 2013. The reduction has come through: paring back exploration spend; prioritisation of marginal activity; and the capture of accelerating deflation in the supply chain as we time our investment decisions.
We also continue to move quickly to lower controllable cash costs across the group. The group’s cash costs over the last four reported quarters were $6.1 billion lower than 2014 levels, putting us well on track to achieving our goal of a $7 billion reduction in 2017 cash costs compared with 2014.
Cash cost reductions(¹)
(1) Cash costs are the principal operating and overhead costs that management considers to be most directly under their control; see bp.com for further information. Cash cost reductions measured over the preceding four quarters, relative to 2014
A medium-term financial frame
Balancing organic sources and uses of cash
Our aim, as noted, is to re-establish a balance in our financial framework where operating cash flow covers capital expenditure and the current dividend in a $50-55 per Brent barrel price range. This retains the dividend at a level we believe is supported by the long-term cash generating capability of our underlying businesses, without damaging our growth objectives. Our ultimate aim over time is to sustain a position where operating cash flow from our business covers capital expenditure and the dividend. Once rebalancing is achieved, and based on our current portfolio, free cash flow is expected to start to grow at a similar price level. This is supported by the stronger cash flows expected from the next tranche of Upstream project start-ups and resilient performance from the Downstream.
Organic free cash flow per share (¹)
We continue to expect $3-5 billion of divestments in 2016 and around $2-3 billion per annum thereafter, in line with our historical norms. The proceeds from these divestments provide additional flexibility to manage oil price volatility and capacity to meet our Deepwater Horizon payment commitments in the United States.
(1) Organic free cash flow: operating cash flow excluding Gulf of Mexico oil spill payments less organic capex. In USD per share (2) DPS: dividend per ordinary share (3) 2020: Brent prices real
Balance sheet resilience
20-30% gearing band re-established
During 2010 we lowered our gearing band from a historical range of 20-30% down to 10-20% to manage uncertainties, mainly in relation to the Deepwater Horizon incident. Having finalised these agreements, we have re-established a 20-30% gearing band going forward.
Forward-looking statements - cautionary statement
In order to utilize the ‘safe harbor’ provisions of the United States Private Securities Litigation Reform Act of 1995 (the ‘PSLRA’), BP is providing the following cautionary statement. This presentation and the associated slides and discussion contain forward-looking statements – that is, statements related to future, not past events – with respect to the financial condition, results of operations and business of BP and certain of the expectations, intentions, plans and objectives of BP with respect to these items, in particular statements regarding BP’s medium-term goal of balancing organic sources and uses of cash by 2017 at $50–55/bbl; expectations regarding future oil and gas prices and market trends, including volatility and levelling out of supply; expectations regarding BP’s growth in the near term and to 2030, including future construction and the timing thereof and future production levels and capacity; plans and expectations regarding BP’s goal of growing sustainable free cash flow and distributions; BP’s plans and expectations regarding the sanctioning of future projects; expectations regarding BP’s share of Rosneft’s production and net income and the amount of dividend payable by Rosneft to BP and BP’s organic capital expenditures and cash cost savings through 2017; expectations with respect to the total amounts that will ultimately be paid by BP in relation to the Gulf of Mexico incident and the timing thereof; plans and expectations regarding Upstream growth to 2030, including increasing capacity, production and contribution to free cash flow; plans and expectations regarding Downstream contribution to free cash flow and refining margins and growth opportunities; expectations regarding Upstream third-quarter 2016 reported production, Downstream third-quarter 2016 turnaround activity and Other business and corporate 2016 quarterly charges; expectations regarding rebalancing of sources and uses of cash including the effect of rebalancing on free cash flow, cash flows expected from Upstream project start-ups and from Downstream and expectations regarding future investment and distributions to shareholders; expectations regarding the value of divestments in 2016 and thereafter, non-operating restructuring charges in 2016 and the impact on cash flow through 2017, Upstream activities in Indonesia, Egypt and the Gulf of Mexico and Upstream base decline and production costs; and expectations regarding Downstream cost efficiencies, performance improvement, programmes and headcount reduction and expectations regarding the fuels marketing and lubricants businesses. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will or may occur in the future and are outside the control of BP. Actual results may differ materially from those expressed in such statements, depending on a variety of factors, including: the specific factors identified in the discussions accompanying such forward-looking statements; the receipt of relevant third party and/or regulatory approvals; the timing and level of maintenance and/or turnaround activity; the timing and volume of refinery additions and outages; the timing of bringing new fields onstream; the timing, quantum and nature of certain divestments; future levels of industry product supply, demand and pricing, including supply growth in North America; OPEC quota restrictions; PSA effects; operational and safety problems; potential lapses in product quality; economic and financial market conditions generally or in various countries and regions; political stability and economic growth in relevant areas of the world; changes in laws and governmental regulations; regulatory or legal actions including the types of enforcement action pursued and the nature of remedies sought or imposed; the actions of prosecutors, regulatory authorities and courts; exchange rate fluctuations; development and use of new technology; recruitment and retention of a skilled workforce; the success or otherwise of partnering; the actions of competitors, trading partners, contractors, subcontractors, creditors, rating agencies and others; our access to future credit resources; business disruption and crisis management; the impact on our reputation of ethical misconduct and non-compliance with regulatory obligations; trading losses; major uninsured losses; decisions by Rosneft’s management and board of directors; the actions of contractors; natural disasters and adverse weather conditions; changes in public expectations and other changes to business conditions; wars and acts of terrorism; cyber-attacks or sabotage; and other factors discussed under “Risk factors” in BP Annual Report and Form 20-F 2015 as filed with the US Securities and Exchange Commission.
This document contains references to non-proved resources and production outlooks based on non-proved resources that the SEC’s rules prohibit us from including in our filings with the SEC. U.S. investors are urged to consider closely the disclosures in our Form 20-F, SEC File No. 1-06262. This form is available on our website at www.bp.com. You can also obtain this form from the SEC by calling 1-800-SEC-0330 or by logging on to their website at www.sec.gov
Reconciliations to GAAP – This presentation also contains financial information which is not presented in accordance with generally accepted accounting principles (GAAP). A quantitative reconciliation of this information to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found on our website at www.bp.com.
Tables and projections in this presentation are BP projections unless otherwise stated.