BP CEO Bob Dudley was among the first industry executives to acknowledge the “lower for longer” oil price scenario. Since doing so in 2014, this thesis has largely become the narrative of the downturn, as companies slash spending, reduce headcounts, and attempt to adjust operations to the new environment. Though still the predominant narrative, a growing number of observers are seeing a price recovery possible by the end of 2016. Dudley is among them. But in the meantime, he says more spending cuts are possible as BP continues to recalibrate its strategy to the realities of the current environment.
As is the case every earnings season, BP is the first major to report earnings. Here are some of the key takeaways from Tuesday’s report:
80% Decline In Profits
The British major saw an 80% fall in profits in 1Q16. Though very steep, recall that the first quarter period includes the drastic plunge in prices to 13-year lows earlier this year. Since late February, prices (though still very volatile) have rebounded somewhat amid production freeze chatter and forecast declines in non-OPEC (chiefly U.S.) tight oil production.
BP saw its largest annual loss in 2015. It cut its Capex three times last year to $19 billion, reduced its headcount by almost 10% and steeply cut costs.
More Spending Cuts Possible Depending On Oil Price
Given this reality, BP lowered its 2016 Capex to $17 billion from $17-$19 billion and said it could be lowered further in 2017- to $15-$17 billion- if oil prices remain depressed. Due to these cost cuts, BP said it can breakeven at $50-$55/bbl prices next year, down from the $60/bbl it previously forecast.
“BP now expects total organic capital expenditure in 2016 to be around $17 billion and, in the event of continued low oil prices, sees flexibility to move to $15-17 billion in 2017,” Dudley said.
Price Recovery By Y/E
Like a growing number of his peers, CEO Dudley said he projects oil prices to start recovering toward the end of this year due to robust fuel demand and weak supply growth. “Market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year,” he said.
BP’s downstream segment saw a profit of $1.8 billion in 1Q, offsetting a $747 million loss in upstream. BP’s quarterly net income was $532 million, down from $2.6 billion last year but beating estimates for a $140 million loss.
More Divestments Planned
BP also said it plans for cash costs to be reduced by $7 billion for 2017 versus 2014, and for $3-$5 billion in divestments this year and $2-$3 billion from 2017.