BP’s liquidity position
BP’s (BP) cash flow from operations rose 22% YoY to $7.0 billion in 1H17. BP’s cash outflow from investing stood at $7.8 billion in 1H17 compared to $7.3 billion in 1H16.
Also, BP’s cash flow from financing was positive, as BP raised fresh debt in the first half. First, let’s look at the company’s need for fresh debt.
In 1H17, BP produced $7.0 billion in cash from operations. However, it had a cash outflow of $8.6 billion in the form of an addition to plant, property, and equipment and $2.9 billion in the form of dividends, which added ~$11.5 billion of cash outflow. This trend resulted in a cash flow shortfall of $4.5 billion, which represents the difference between its cash inflow of $7.0 billion and cash outflow of $11.5 billion.
BP funded the shortfall by resorting to fresh debt. BP raised $3.1 billion of net debt in 1H17, received $0.7 billion from its divestment of assets and business, gained $0.4 billion in currency translation, and used some portion of its cash reserves.
If we estimate BP’s shortfall as a percentage of its earnings capacity, its cash flow from operations would stand at 63%. Comparatively, Chevron (CVX) had a much lower shortfall of 19% in 1H17.
However, ExxonMobil (XOM) and Royal Dutch Shell (RDS.A) had surpluses of 18% and 25%, respectively, in the first half of 2017. For more on this topic, you can refer to XOM, CVX, RDS.A, BP: Who Had Better Cash Flows in 1H17?
What to expect going forward
BP’s strong upstream project pipeline could add to BP’s overall oil and gas production. BP’s strategy includes optimizing capex, reducing cost structure, and keeping its Gulf of Mexico spill charges under control. Considering this strategy as well as its solid upstream portfolio, BP’s earnings should increase, resulting in improved cash flow and a better liquidity condition.
If you are interested in the latest analysis on crude oil prices, please read What if US Crude Actually Does Stay above $50?