BP is considering further cuts to next year's capital expenditure (capex) budget as falling oil prices squeeze revenue and reinforce the major's drive to improve capital discipline. But the company has warned that measures to restructure the business to reflect its smaller size are likely to result in around $1bn of non-operating charges.
BP reiterated to investors today that it has the flexibility to reduce organic capex next year by $1bn-2bn from its previous $24bn-26bn guidance and that it continues to look for ways "to pare or rephase" investment next year without compromising growth. The firm has not ruled out further spending cuts beyond the potential $1bn-2bn identified in October but says that will depend on how costs evolve in a lower price environment.
BP expects costs to fall but the decline will be lagged. "History shows the strong alignment with industry costs and oil prices, with cost changes generally reacting to oil price movement with a lag of 1-2 years," upstream chief executive Lamar McKay said today at a strategy briefing. "With oil prices where they are today, we expect this natural self-correction mechanism to become self-evident in supply chain deflation."
Much of BP's capex for next year is already committed, but the sharp drop in oil prices since June forced the firm to reassess its discretionary spending plans. BP will not announce its updated 2015 capex budget until the fourth-quarter results are published early next year, giving it extra time to review investment levels in light of Opec's decision last month to keep its 30mn b/d output ceiling unchanged. "A lot depends on the pace of deflation," McKay said.
The firm remains confident that its recent investment decisions will hold up in the current price environment but is likely to raise the bar for future project approvals. "While BP approves projects at $80/bl, it also already tests each at $60/bl to understand the resilience of the portfolio at a range of prices. It will also continue to consider lower price sets as appropriate," the company said.
The firm has played down concerns that a pull-back in spending and potential project deferrals or cancellations will hamper future growth. It said it has a suite of new upstream projects capable of adding over 900,000 b/d of oil equivalent (boe/d) to its production by 2020. "We have already taken final investment decisions and are constructing the projects that are expected to deliver around half of these volumes. We are in the design stage on the rest, and all of these projects are expected to move to the construction phase by 2017 or earlier," McKay said. Those projects already approved include the Clair Ridge oil development in the UK's west of Shetland region and the Khazzan tight gas field in Oman. Both are due on stream in 2017 and will produce a combined 300,000 boe/d at peak.
Falling oil prices have prompted BP to accelerate plans to simplify its corporate structure to better reflect its post-Macondo portfolio. The firm has already spent several months reviewing how to take out unnecessary overheads and avoid duplication but admitted earlier this week that "the oil price has focused minds". The simplification process will result in an unspecified number of job losses.
BP expects to incur around $1bn of non-operating charges over the next five quarters, including the current quarter, as a result of the restructuring. "We have already been working very hard over these past 18 months or so to right-size our organisation as a result of completing more than $43bn of divestments," chief executive Bob Dudley said. "The simplification work we have already done is serving us well as we face the tougher external environment. We continue to seek opportunities to eliminate duplication and stop unnecessary activity that is not fully aligned with the group's strategy."
BP reiterated today that it is prepared to increase debt or tap its cash reserves in the short term to weather the downturn, saying that its strong balance sheet "provides time and flexibility to adjust to changes in the environment".
jk/ts
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