When the oil price started stabilizing above $60 per barrel earlier this year, many market forecasters and rating agencies predicted the energy majors to have a much better financial year. ExxonMobil, Chevron, Royal Dutch Shell, Total and BP were all slated to be in line for improved profits.
All of the five major integrated oil companies had responded to the crude price collapse of 2015-16 by cutting costs, slashing capital spending and divesting assets.
But with one or two sets of quarterly financials now out in the open since the summer, it would be fair to say that BP (LON:BP) has trumped its peers by positioning its businesses to better prosper in a world of range-bound crude prices. While others may disagree, for me that range is $60-80 where much of the short-term price oscillation is likely to take place.
BP said on Tuesday (October 30) that its third quarter underlying replacement cost profit – an internal measure of net income – rose to a five-year high of $3.8 billion, smashing market forecasts of $2.85 billion. That is more than double the figure noted in the corresponding quarter last year of $1.86 billion, and an uptick on the impressive $2.8 billion posted in the second quarter this year.
In step with headline financials, underlying pre-tax profit for BP’s upstream business more than doubled on an annualized basis to around $4 billion. Finally, revenue in the July-to-September quarter rose 33% on an annualized basis to $80.8 billion.
Drawing a direct connection with the oil price, as many commentators dissecting the oil major’s financials have done in the wake of its sterling performance, is too linear an explanation. Of course, it matters that the oil price, using Brent as a benchmark, has averaged just above $75 per barrel for the past three months; an uptick of 44% year-on-year.
However, BP’s business diversification, downstream optimization and improved output reliability in the case of both oil and natural gas sites have had a massive bearing. What’s more, the company’s oil and gas output which has seen steady improvements over the past nine calendar months to 2.46 million barrels of oil equivalent per day (boepd), is about to be boosted further via new fields.
BP’s recently announced $10.5 billion acquisition of U.S. shale assets from BHP Billiton is due for completion on Wednesday (October 31). It alone would add 190,000 boepd to the group production total. Five major BP projects have also come onstream in 2018 in the Gulf of Mexico, Australia, Azerbaijan, Russia, and Egypt.
The company’s Thunder Horse Northwest expansion project in the Gulf of Mexico and the Western Flank B project in Australia started production in October ahead of schedule. Shah Deniz 2 in Azerbaijan, Taas-Yuryakh expansion in Russia, and Atoll in Egypt also started producing earlier this year.
Furthermore, BP’s Clair Ridge project in the U.K. is expected to start production “before year-end.”
Chief Executive Officer Bob Dudley said: “Operations are running well across BP and we’re bringing new, higher-margin barrels into production faster through efficient project execution.” So confident a mood is BP in, that it has decided to pay for the U.S. shale asset acquisition – its largest purchase in 20 years – out of cash reserves, providing there is no oil price slump, rather than through selling shares as it had advised the market earlier.
Chief Financial Officer Brian Gilvary said: “Since we announced the BHP transaction, oil prices have firmed to levels significantly above the acquisition assumptions. While oil prices remain at these levels, we expect to finance the transaction fully using cash.”
And there you have it – a visible shift from the torrid time BP had in the past few years over the 2010 Deepwater Horizon oil spill for which it has set aside another $500 million to cover the damage costs from the accident. The oil major also said it still plans to sell $5-$6 billion of assets to reduce debt.
In the midst of all this positivity, BP refuses to get carried away, quite unlike many in the market offering $100 oil price forecasts. Dudley, Gilvary and Janet Kong, boss of BP’s Eastern Hemisphere integrated supply and trading, have all dismissed assertions of a prolonged return to three-figure oil prices.
So if the latest developments and figures revealed by the company tell us anything, its that BP is pragmatic about oil prices, reducing its break-even, investing in downstream, and increasing exposure to alternative fueled mobility and renewables in the current era of range-bound prices. The competition ought to be watching keenly and smart money says it probably already is.