BP: Grim results but brighter prospects as company cuts back
BP's retreat from the US looks more certain with each passing week, a move that will reinforce its strategic shift to more prospective regions and may signal the beginning of the end of its troubles in the country. But pruning must yield new growth, especially upstream
For now, the firm is concentrating on cutting. On 1 February, chief executive Bob Dudley unveiled plans to pare back the UK supermajor's US refining and marketing arm. BP retains some valuable upstream assets in the country, but long-term decline in Alaskan production and the moratorium on drilling in the Gulf of Mexico (GOM) don't leave much to encourage shareholders.
Nor did the company's results for 2010: truly an annus horribilis for the company. BP posted a $4.9bn loss for last year, its first annual loss since 1992. The loss includes a total pre-tax charge of $40.9bn, related to last year's Macondo blowout and oil spill. In 2009, BP booked full-year profits of $13.9bn. Underlying replacement-cost profit came in at $4.4bn, below analysts' expectations of around $5bn. But neither BP's decision to resume dividend payments, suspended after Macondo, nor their relatively paltry size – $0.07 a share, roughly half their previous amount – came as a surprise.
Rolling up the US downstream business isn't a shock either. BP's 475,00 barrels a day (b/d) Texas City refinery – the site of a fatal explosion and fire in 2005 – has been put up for sale as a going concern, as has its 265,000 b/d Carson refining unit in California. The decision, which one analyst claimed was akin to "skinning a valuable cat", halves BP's US refining capacity.
"There are no big surprises here," he said. "BP is doing the same as Shell did after its reserves downgrade in 2004. It's retrenching and looking at pushing for growth from a smaller base." Unveiling his firm's results, Dudley's comments were heavy with pledges to "reset" the company and "adjust" its business. The coming year would be one of "recovery and consolidation", he said. BP would reduce "operational risk" and meet its Macondo "commitments" (PE 02/10 p40).
In a conference call, Dudley touched on Macondo as he set out his vision of a "safer, stronger, more sustainable, more trusted" BP, telling investors: "We believe BP was not grossly negligent." He confirmed that the supermajor is scaling back its presence in the US oil play, pinning its exploration and production hopes further afield.
The US retreat is logical – discretion is, after all, the better part of valour. And with the GOM out of bounds, the company's most prospective assets lie dormant. But BP cannot regroup effectively if it does not focus on production.
It has shed substantial weight in the past 10 months as it freed up cash to meet its Macondo liabilities. Most of the $22bn raised so far has come from the sale of producing assets, reflected in its 9% year-on-year drop in fourth-quarter production. Output for the quarter ended 31 December came in at 3.67m barrels of oil equivalent a day (boe/d). BP says the rest of its $30bn Macondo fund will be in place by year-end.
But this war chest has been built up at the expense of output. BP's 2011 production guidance of 3.4m boe/d, down from last year's 3.8m boe/d does little to inspire further confidence. Indeed, one analyst said the market was "underwhelmed". BP's 2010 reserves-replacement ratio, excluding divestments and acquisitions, came in at 106%, while its resource replacement ratio was 470%.
While BP's short-term prospects are still clouded by Macondo, there is hope in the long-term. By 2017, BP plans to bring 32 projects on stream, adding a total of about 1m barrels a day to its output. It has also landed a clutch of new licences for promising prospects around the world, including Australia, Brazil, the South China Sea and the UK.
Russia is even more promising. Through its venture with TNK, the country already accounts for a quarter of BP's production. But its alliance with Russian state-run Rosneft, targeting the frontier Kara Sea, may prove to be the new slim-line BP's true production lifeline.
BP needs to keep its investors happy – a $0.07 per share dividend only goes so far – and it needs to boost its bottom line. To do that, it must pump up its production volume.
While the Rosneft deal carries risks – BP's partners in the TNK-BP joint venture may still scupper it – the potential rewards are great.