The oil price may be at its highest for three years, but there is much more to BP’s impressive first quarter performance than a stronger environment, says chief financial officer, Brian Gilvary, citing record reliability, rising production and a range of new activities all laying the foundations for further sustainable growth
BP is reporting its strongest quarterly results in three years. What have been the main factors contributing to this outcome?
This is a strong set of financial results for the first quarter of 2018, with underlying replacement cost profit of $2.6 billion – that’s 71% up on a year ago. The Upstream numbers are particularly important, as they point to the ramp-up of the seven major projects that we brought on stream last year, as well as strong reliability of our kit. Together, that’s produced the highest underlying Upstream number we’ve seen in four years. The last time we saw numbers at this level of performance, the oil price was over $100 per barrel.
* excluding post-tax Gulf of Mexico oil spill payments
Operating cash, excluding Gulf of Mexico payments, for the quarter is $5.4 billion but we had a working capital build of $1.7 billion for the quarter, reflecting higher oil prices and seasonal factors. So, adding those two numbers back together amounts to more than $7 billion of operating cash flow, meaning we’re on a strong trajectory towards the targets we’ve laid out. We’re also on track for the year to cover capital expenditure and the dividend in a $50 environment, and we’ve continued to stay in the market by buying back shares to offset the dilution from issuing scrip dividends.
How much are these results down to a stronger external environment – or are they down to BP’s performance?
Our results definitely benefitted from the higher oil price during the first three months of 2018. But, more importantly, they reflect the growing production from last year’s Upstream start-ups. We have six major projects to start up this year which will help to maintain our momentum.
And there’s a strong set of results from the Downstream in what was a difficult environment for refining margins – we still delivered $1.8 billion of pre-tax earnings.
So, yes, the rising oil price – averaging $67 per barrel – helped us but overall our Upstream projects and the reliability of our kit across both segments have driven this performance.
Does this higher oil price influence any of the investment plans for growth that you’ve previously laid out?
We have a strict capital framework and we’ll continue our focus on disciplined spending. We’re not going to chase higher oil prices and start looking for more projects in this environment. Our investment plans are on track and we’ll live within the $15-17 billion framework that we’ve previously set out. In 2018, we’re aiming to spend around $15-16 billion and, if anything, we're trending towards the lower end of that range right now.
We’ll see benefits from the higher oil price as that will help strengthen the balance sheet through the year; net debt and gearing will start to track down and then we’ll look at the balance between the distribution of returns to investors and further investment in the business.
Speaking of investments, four new Upstream projects have been given the go-ahead. What do these mean for future growth?
These four final investment decisions are really important. In 2017, we replaced our reserves by more than 140% and these four early in 2018 are a good signal for the renewal and replenishment of our future production portfolio.
With two in the UK North Sea, one in India and another in Oman, they’re in different regions of the portfolio and enhance our positions in those established locations. They help us build towards the growth target that we’ve laid out for the next four years.
Elsewhere in the world, BP and Petrobras have entered into a new strategic alliance. What opportunities do you see arising from that partnership in Brazil?
Petrobras is a world-class company and we’ve engaged with them on many different fronts over the past decade. I expect all sorts of opportunities will open up as a result of this alliance; watch this space as more activities come to light across both main segments, as well as perhaps in technology and renewables. I think it’s huge – and will add value on both sides.
In another significant move, BP has published its approach to low carbon, including new targets for its operational emissions. How does this work with your commitment to creating value and return for shareholders?
We’re focused on how to address the dual challenge: to supply the energy that the world demands as the population grows, while recognizing the need to reduce emissions.
There’s no question that oil and gas will form part of the future energy mix, and we need to supply them in a sociably responsible way. Hence, the plans that we’ve just laid out in April are our latest significant step to address this challenge.
Since the UN Climate summit in Paris, we’ve seen a new wave of momentum and what we’ve done at BP is provide a business framework so that people who invest in us recognize that we’ll tackle the lower carbon transition in three ways: through reducing the emissions in our existing portfolio, by improving our products for customers and by looking at the opportunities we can create in low carbon areas.
We’ll pursue all three of these actions within our existing financial framework, using our established investment decision processes and we’ll continue to factor a carbon price into our plans for large new projects. This will allow us to make significant reductions in our operational emissions, and we’ve set an overarching target to grow our underlying business over the next four to five years while keeping our net operational emissions flat. We’ve set the targets out to 2025 as we believe they’re measurable and the market can see how we perform against those.
Back to today, BP is now five quarters into the five-year plan it laid out in 2017. You’ve said before that each quarter the bar is raised higher, how will BP continue to increase its competitiveness?
We’ve now built a solid five-quarter track record that gives our investors confidence that our targets are achievable. We’re seeing momentum both in terms of Upstream projects that are now on stream, in some cases ahead of schedule and under budget, and continued focus on underlying performance in the Downstream.
There’s now resilience in the Downstream, as well as big growth due in the Upstream over the next 15 quarters. Put together, this sets us on a strong trajectory – and, yes, it raises the bar yet again. To meet those expectations, our people need to stay focused on the priorities we’ve laid out, with safety at the top of that list.
Both the Upstream and Downstream have recorded stand-out quarters in terms of reliability. Why is this significant?
Reliability is important because when the kit is running well, that equates to more production, allowing us to capture higher revenues and margins. There’s no question that both segments have established a very strong track record and I believe that’s a reflection on our focused investment in safety over the last five to seven years. Reliability underpins everything this quarter and indeed every quarter since we set out our five-year plan – and it has a direct impact on our financial results.
And finally, looking ahead, what do you see as the oil price outlook for the rest of 2018?
I think the oil price will remain volatile. Similar to last year, we’re seeing strong demand growth in 2018 – around 1.7 million barrels a day. We’re seeing OPEC compliance, but also compliance within the non-OPEC participating countries. So, we’re starting to see global stock levels approaching the five-year average.
In the second half of the year, we may see further guidance from OPEC, but I think demand will remain strong. We’ll see more production come out of the US lower 48, over a million barrels a day and possibly up to a million-and-a-half, which could dampen the upside of the oil price.
But, from our perspective, at BP we plan to balance our sources and uses of cash at around $50 per barrel. The benefits of a higher price mean our balance sheet will strengthen and, ultimately, that will avail us of cash to distribute to our shareholders.