Article from FT1 Aug 2017 20:32
BP is aiming to drive down costs to the point that it can make money with crude prices below $40 per barrel in a sign of the industry accepting weak prices are here to stay.
Bob Dudley, chief executive, said he wanted to reduce BP’s cash flow break-even point — the oil price needed to cover its capital expenditure and dividends — “into the $30s” over the long term.
He set the goal after unveiling better than expected second-quarter profits, which, following similar results from Royal Dutch Shell and Total last week, showed how Europe’s oil majors are adapting to prolonged price weakness.
BP lowered its break-even point to $47 per barrel in the first half, allowing it to generate $6.9bn of free cash flow — 31 per cent more than in the same period last year — at an average oil price of $48 per barrel.
Mr Dudley said BP was working on the assumption of crude prices remaining locked in their current $45-$55 per barrel range into next year, as buoyant supplies from US shale producers vie with efforts by Opec producer nations and Russia to curb output.
“If we can bring the cash balance down into the $30s it would make us a very healthy, profitable company,” he told the Financial Times.
BP has already reduced its unit production costs by 40 per cent since 2013, when the industry was gorging on oil prices above $100 per barrel before the market crashed the following year. Mr Dudley said there were further savings to be found in the supply chain and by taking advantage of data and technology to increase efficiency.
His comments reflect continued pressure on the world’s biggest oil and gas companies to increase the competitiveness of their conventional resources against flexible and relatively low-cost US shale production.
Mr Dudley acknowledged that US shale had become the world’s “swing producer,” with a “dampening effect” on cyclical swings in the market because shale wells can be ramped up quickly when prices rise and mothballed when they fall.
This was forcing BP to be highly selective about where to invest, he said, with only the most attractive projects receiving capital. The group took a $750m writedown in the second quarter on an exploration block in Angola which it decided to relinquish because it was deemed uneconomic to develop.
The Angola charge caused earnings to fall by 5 per cent from last year to $684m, but this was well above the $500m consensus forecast by analysts. BP shares were up 3 per cent on Tuesday afternoon at 459.10p. Lydia Rainforth, analyst at Barclays, called the results “positive” with signs that cash flow momentum was continuing to build.
Despite its tight rein on spending, BP has increased investment over the past 12 months as it rebuilds its portfolio after years of retrenchment since the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, which cost the group about $62bn.
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