BP group chief executive Bob Dudley today said that returning operational momentum and strong cash flow generation in 2011 gave the company increasing confidence in its plans to grow value for shareholders.
As BP reported its results for the fourth quarter and full year 2011, Dudley said: “BP is on the right path, working to grow value through the 10-point plan we laid out in October. Above all, we have a relentless focus on safety and risk management. And we are playing to our strengths – investing in exploration, deep water, gas value chains, giant fields and a world-class downstream, while actively managing our portfolio to grow value.”
“2012 will be a year of increasing investment and milestones as we build on the foundations laid last year. As we move through 2013 and 2014, we expect financial momentum will build as we complete payments into the Gulf of Mexico Trust Fund, restore high-value production and bring new projects on stream.”
With operating cash flow generated by BP in 2011 reaching some $22bn – over 60 per cent higher than in 2010 – Dudley confirmed the company’s expectation that net cash flow in 2014, in a $100 oil price environment, would be around 50 per cent higher than in 2011. Half of the additional cash is expected to be used for re-investment and half for other purposes including increased shareholder distributions.
BP today announced a 14 per cent increase in its quarterly dividend – to 8 cents per share for the fourth quarter of 2011 – the first rise since the company resumed paying a dividend a year ago. BP’s underlying replacement cost profit for the quarter rose by 14 per cent on the same period in the previous year.
In a presentation to the financial community later today, Dudley and BP’s executive team will give details of the company’s results and forward strategy, setting out the milestones they expect for BP in 2012, including:
• drilling 12 exploration wells, double the 2011 total;
• starting up six major upstream projects in higher-margin areas;
• operating with eight rigs in the US Gulf of Mexico by the end of the year;
• continuing progress with the major divestment programme to strengthen its portfolio;
• increasing capital investment to around $22 billion as BP invests to grow in the upstream;
• completing the delivery of a $2 billion improvement in underlying performance in the downstream, relative to 2009;
• completing payments into the Gulf of Mexico Trust Fund.
4Q 2011 Results
BP’s replacement cost profit, on an underlying basis, adjusting for non-operational items and fair value accounting effects, was $5.0 billion for the fourth quarter, compared to $4.4 billion a year earlier. For the full year underlying replacement cost profit was $21.7 billion compared to $20.5 billion for 2010.
Operating cash flow in 2011 was $22.2 billion, in a $111 oil price environment, up 63 per cent on the total for 2010. At the end of 2011 BP’s net debt stood at $29.0 billion, representing a gearing level of 20.5 per cent.
Dudley said he expects organic capital spending will grow to some $22 billion in 2012, up from 2011’s $19 billion as BP invests in growth. He anticipates investment of $16–17 billion in the upstream as BP invests in its pipeline of major projects and increases its exploration spend. Around $4.5 billion is expected to be invested in BP’s downstream businesses, slightly higher than 2011 as activity levels at the Whiting refinery upgrade ramp up.
During 2010 and 2011 BP received $19.7 billion in receipts from completed divestments and has agreements in place but not yet completed for a further $1.8 billion. As it continues to actively manage its worldwide portfolio of business, focusing the company around a distinctive, high-quality upstream portfolio and a world-class set of downstream businesses, BP plans to continue this divestment programme to $38 billion by the end of 2013.
Exploration and Production
Following October’s turning point, BP’s oil and gas production rose by over five per cent or 170,000 barrels of oil equivalent a day (boed) from the third to the fourth quarter of 2011. For the year, production averaged 3.45 million boed, ahead of the expectation of 3.40 million boed that the company had set for the year.
Dudley said he expects underlying production in 2012 to be broadly flat, excluding TNK-BP. Reported production is expected to be lower than 2011, with the actual outcome depending on divestments, OPEC quotas and the impact of oil price on production sharing agreements. The impact of divestments is expected to be around 120,000 boed in 2012 compared to 2011, depending on the timing of transactions.
Six major upstream projects in higher unit operating cash margin areas – in Angola, the Gulf of Mexico and the North Sea – are expected to come on stream in 2012. Momentum will continue through 2013 and 2014 as BP plans to bring a further nine projects into production. All of these projects are expected to deliver an average unit cash margin by 2014 that is around twice that of BP’s 2011 upstream portfolio.
BP completed an extensive programme of 47 major turnarounds on its upstream operations during 2011, investing in long-term reliability and safety. BP’s focus on safety and operational risk will continue in 2012 with a programme of around 37 planned turnarounds. Overall production outages are expected to be lower in 2012.
Dudley said BP had had an unparalleled year for new access to exploration prospects in 2011: “We believe this resulted in more new net acreage than accessed by any of our peers in 2011. We now have a robust pipeline of opportunities with exploration prospects that will generate new resources and projects well into the next decade. We will see a continued ramp up of exploration over the next two to three years.” BP plans to drill 12 exploration wells during 2012, up from six last year.
BP reported a reserves replacement ratio for 2011 of 103 per cent, excluding acquisitions and divestments.
Refining and Marketing
BP’s Refining and Marketing segment reported a record underlying pre-tax profit of $6.0 billion in 2011 and is on track to deliver by 2012 an annual improvement of over $2 billion in underlying performance relative to 2009.
“We have seen a remarkable turnaround in our downstream businesses over the past few years,” said Dudley. “We have a very strong set of businesses, with unique technologies, a focus on improving margin capture and positions in growth markets. We expect the downstream to be a material contributor to the cash flow growth we anticipate over the next few years.” The upgrade of the Whiting refinery, expected to come on stream in the second half of 2013, is expected, depending on the environment, to generate over $1 billion operating cash flow a year.
BP continues active portfolio management in the downstream and today announced its intention to divest its bulk and bottled LPG marketing business. From this quarter BP has split out the reporting of the results of its fuels, lubricants and petrochemicals businesses to better demonstrate the quality of the downstream portfolio and the contribution of these businesses to the Group.
BP received $3.7 billion in dividends from TNK-BP in 2011. Since its formation in 2003, TNK-BP has paid BP a total of around $19 billion in dividends compared to BP’s initial investment of approximately $8 billion. TNK-BP has paid around $160 billion in taxes, duties and levies since its formation. Legal disputes have had minimal impact on the operational and financial performance of the joint venture, and it has a strong portfolio of brownfield and greenfield growth opportunities in Russia and a growing international presence. Starting in 2012 TNK-BP, which is independently managed, will be reported as a separate segment to reflect its size and distinctiveness.