How BP’s Strategy Could Balance Cash Flows at a Lower Oil Price Level
BP’s strategy: financial discipline
In 2H17, BP (BP) expects to improve its financial position by keeping leaner cost structures, optimizing capex, and focusing only on competitive assets. BP expects to reduce costs by improving efficiency, eliminating redundancy, and increasing productivity.
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BP expects its capital expenditure or capex to stay in the range of $15 billion–$17 billion per year until 2021. But it could lower capex below $15 billion. In 2018, if oil prices hover at ~$50 per barrel, the company expects its capex to be ~$15 billion. If oil prices sink even further, BP might consider driving its capex below $15 billion to maintain its cash balance.
Oil spill charges in check
BP’s Gulf of Mexico oil spill charges should stand at ~$4.5 billion–$5.5 billion in 2017, but around $4.3 billion of that was incurred in 1H17, and so the oil spill payments in 2H17 will likely be quite low.
The payments are expected to reduce to ~$2 billion in 2018 and ~$1 billion from 2019 onward. This should bring the heavy oil spill charges, which dented BP’s earnings, under to a minimal level.
Use divestment as a lever
BP expects its 2017 proceeds to stand between $4.5 billion and $5.5 billion, which should decline to $2 billion–$3 billion per year in the long term. BP could also use divestments as a lever to achieve its financial aim of balancing its cash flow at lower oil price points.
In a nutshell
With higher upstream production and margins, higher downstream earnings, lower cost structure, improved capital efficiency, lower and controlled oil spill charges, and requisite divestment proceeds, BP could presumably achieve its goal to balance cash flows at oil price level of $35–$40 per barrel by 2021.
Now let’s take a look at BP’s key upstream projects.