Bp’s earnings ride higher oil prices to best results in three years — the motley fool m gasbuddy app


The reason BP was able to maintain downstream results was some unique investments that allow it to take advantages of different crude prices. Over the past few years, the company invested boatloads of money into its Whiting, Indiana refinery so it could process hard-to-refine oil sands out of Canada. The price of this particular type of crude has been declining lately, because supply is outstripping transportation and refining capacity. So even though feedstock prices, in general, are on the rise, BP can offset those increases with lower Canadian crude prices. The highlights

• Overall production for the quarter was 3.73 million barrels of oil equivalent per day (BOE/D), a 5.7% increase from this time last year. Gaining 5.7% in production from that kind of base is good, but it gets even better. Excluding BP’s interest in Rosneft, production was 2.6 million BOE/D, which was up an even more impressive 9.1% compared to the prior year.

• The company gave the green light for two major new projects: phase 2 of the Khazzan gas project in Oman and phase 2 of its offshore India holdings. Combined, the two will increase production by 205,000 BOE/D, mostly in natural gas. BP also sanctioned the development of two fields in the North Sea that should add another 30,000 barrels per day of oil.

• Management also announced a strategic alliance with Petrobras for potential investments in all parts of the oil and gas business, both inside and outside of Brazil. This isn’t uncommon, though, as many companies have been signing deals with Petrobras lately for similar development projects. So it’s not exactly clear what this alliance grants BP compared to others.

Oil prices have been on the rise in recent quarters, which may entice the people pulling the purse strings to start spending more on growing the business. According to CFO Brian Gilvary, though, BP plans to maintain spending discipline for a while longer:

With growing operating cash flow, we continue to expect the organic breakeven for the Group to average around $50 per barrel on a full dividend basis in 2018, reducing steadily to $35-40 per barrel by 2021 in line with growing free cash flow. And as we look beyond 2018 we continue to expect to grow returns as we grow our earnings within our disciplined investment framework.

While we still have some way to go to on returns, we are seeing good progress on the underpinning drivers of improvement. With the continuing momentum across the business, and growing free cash flow, we remain active in our share buyback programme. With gearing expected to trend down this year we will continue to ensure the right balance between distributions and disciplined investment.

One of the most encouraging things about BP’s investment plans is that the company will be able to bring on a lot of additional production over the next three or four years, while maintaining a relatively modest capital spending plan. That means management should have plenty of cash to give back to investors, in the form of either more share buybacks or dividend increases — or both.

The question that should be a slight concern is whether the company is spending enough for its next wave of projects, which would likely go live five to seven years from now. The two projects that were recently given final approval should give a little clarity about that plan, but don’t be surprised if we start to see management start to add a little extra to its exploration budget either this year or next. For now, though, it looks like BP is going to have a very nice run here in 2018, and possibly into 2019, with all the new major capital projects starting up.