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Balancing Payments

27 October 2015 By Fiona Maharg-Bravo

Oil majors are bending over backwards to show they can cope with low oil prices. Following updates from Total of France and Spain’s Repsol, BP said on Oct. 27 that it reckons its dividend will be self-financed by 2017 at $60 oil. It’s a big ask, but BP’s forecast-busting third-quarter results provide comfort that it can pull it off.

BP already has trimmed annual capital expenditure to $19 billion, and aims for $17 billion to $19 billion in each of the next two years. In order to afford an annual dividend of about $7.5 billion, it needs to generate around $25 billion in operating cashflow by 2017.

Is that doable? BP is on course to make just $18 billion in operating cashflow this year, at a time when the oil price has averaged about $55. True, there is a one-off restructuring charge in the numbers. But BP plans to bring down annual overheads by $6 billion, or about 20 percent on estimates by Citi analysts, between 2015 and 2017. The good news is that half of the work is done. BP beat analyst expectations in the third quarter of the year partly due to cost-cutting across all its divisions.

Lower spending on exploration could hurt growth, of course. BP says much of capex shrinkage is due to industry-wide deflation and re-phasing of projects, rather than retrenching on exploration. Since production grew 4.4 percent in the third quarter, it appears BP appreciates the difference between spending less and cutting back.

BP’s net-debt-to-total-capital ratio has hit the upper limit of its 20 percent target, so it can’t rely on much more debt to fund the dividend. Any shortfall in 2016 could be covered by the $3 billion to $5 billion of planned asset sales. BP’s balancing exercise doesn’t include ongoing liability payments for its Gulf of Mexico oil spill either, although further asset sales from 2017 might help fund those obligations.

The big risk to the BP plan is the oil price. Steps taken so far suggest BP can make ends meet at $60. It may have to go back to the drawing board if oil stays at $50, or lower, for longer.



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