BP hunkers down for prolonged oil slump
Madrid
BP is hunkering down for a prolonged oil slump.
The UK oil and gas major is being more aggressive than many peers, but it also faces more problems than most. While Shell warned of "overreacting" to the price, BP chief executive Bob Dudley is planning for the low oil prices for the near and medium term.
On Feb 3, BP announced a capital expenditure budget this year of US$20 billion, some 20 per cent below previous guidance of US$24-$26 billion and below the US$22.9 billion spent last year. That's more aggressive than Shell or Exxon.
There's more. BP, like smaller British peer BG but unlike Shell, also wrote off billions of dollars in assets in the last quarter of 2014, due to the lower oil prices. And BP promised to cut costs further after freezing pay and axing jobs.
BP is not responding to any current cash squeeze. A combination of US$32.8 billion in operating cashflow in 2014 - above target - and US$4.7 billion in asset sales was more than enough to pay for expenses, including dividends and buybacks. Even in the fourth quarter, net profit surpassed expectations, although the surprise was more on paper than in operations.
An accounting change at Russian producer Rosneft , in which BP owns a 19.75 per cent stake, added US$470 million to operating profit.
BP can't afford to be complacent. It faces lingering risks from its 2010 Macondo spill. The maximum penalty for the Clean Water Act could be US$13.7 billion. BP has only set aside US$3.5 billion so far. Other claims keep trickling in.
Management's ultimate aim is to preserve the dividend. To judge from the toppy 6 per cent yield, investors are not altogether persuaded they will manage, even with a strong balance sheet. BP's gearing is 16.7 per cent, within its 10-20 per cent target range, and borrowing rates are ultra low.
Perhaps the best hope for BP is that other producers eventually follow Mr Dudley's lead. Less investment could eventually make the oil market less grim. BG is doing its part with a 30 per cent slash in spending.
Planning for the worst and hoping for the best may be the way to go.
