BP strategy update: getting back to growth
- Cash flow growing materially:
- Upstream $13-14 billion pre-tax free cash flow in 2021
- Downstream $9-10 billion pre-tax free cash flow in 2021
- Continuing discipline in capital and costs:
- Financial frame maintained to 2021, organic capital spending $15-17 billion a year, gearing 20-30%
- Rising production from new Upstream major projects:
- 6 projects began production in 2016; 7 projects to come online in 2017; 9 projects now under construction expected onstream 2018-21
- Upstream production expected to grow by average of 5% a year from 2016 to 2021
- Cash balance point for BP expected to fall to around $35-40/barrel in 2021
BP today updates the financial community on details of its strategy and, in particular, medium-term plans for the next five years, based on oil prices similar to where they are today. Following a presentation today in London, BP management teams will this week travel to London, Edinburgh, New York, Dallas, Houston, Paris and Frankfurt to update investors.
Over the past six years BP has delivered around $75 billion of divestments, focused investment to build a distinctive and balanced portfolio, and improved safety, reliability and underlying performance. Group chief executive Bob Dudley and his management team are now setting out plans to 2021, demonstrating how BP plans to deliver growth throughout its businesses over the next five years.
Bob Dudley said: "In six years we have fundamentally reshaped and built a very different BP. We are now stronger and more focused - fully competitive and fit for a fast-changing future.
"We have proven financial discipline, clear plans in action and have built a distinctive portfolio which gives us a strong platform for growth, now and into the future. Striking a balance between short and long-term value, our recent acquisitions and agreements have strengthened this even further.
"We can see growth ahead right across the Group. While always maintaining our discipline on costs and capital, BP is now getting back to growth – today, over the medium term and over the very long term."
Over the next five years BP expects both of its major operating segments to deliver material growth in operating cash flows while the Group maintains its existing financial frame. In the Upstream, growth is expected to come from a continuing series of major higher-margin project start-ups, while the Downstream expects to deliver strong marketing-led growth, both underpinned by BP's continued focus on safe and reliable operations, increasing efficiency, simplification and modernisation.
Production ramping up from new Upstream projects is expected to deliver a material improvement in BP's operating cash flow through the second half of 2017.
BP intends to maintain its existing financial frame throughout the five years to 2021, with organic capital expenditure kept within a range of $15-17 billion a year and the target band for gearing remaining at 20-30%.
Brian Gilvary, BP chief financial officer, said: "Last year we delivered our targeted $7 billion reduction in cash costs a year early, and capital spending was $8.6 billion lower than its peak in 2013 – without damaging our growth pipeline. We will continue that tight focus on costs and capital discipline and seek further improvements throughout the Group.
"We expect this combination of continued cost discipline with the growing cash flow from our core businesses - and the recent portfolio additions - will steadily drive down the cash balance point of the business. Over the next five years we expect this to fall to around $35-40 a barrel for the Group overall."
Volume and margin growth throughout BP's businesses are expected to increase returns over the next five years. Assuming a stable price environment and portfolio, BP now expects return on average capital employed (ROACE) for the Group to recover steadily over the next few years and to be over 10% by 2021.
Over the past five years BP's Upstream segment has begun production from 24 major projects, including six in 2016. Seven projects are expected online during 2017 - making it one of the largest years for commissioning new projects in BP's history. These projects are on average ahead of schedule and below budget. A further nine projects that are expected to start up through 2018-2021 are already under construction.
The projects coming on line in 2016 and 2017 are on track to deliver 500,000 barrels of oil equivalent a day (boe/d) new production capacity by the end of this year.
The new Upstream projects remain on track to deliver 800,000 boe/d of new production by 2020, as previously guided. On average, the new projects are also expected to have operating cash margins 35% higher than the average of BP's Upstream portfolio in 2015.
More than 200,000 boe/d of production is expected by the end of the decade from the recent additions to BP's portfolio – primarily from the ADCO onshore concession.
This strong pipeline means that BP is now confident that Upstream production will grow from 2016 by an average of 5% a year out to 2021. BP Group production, including BP's share of production from Rosneft, is expected to be around 4 million boe/d by 2021.
With capital investment kept steady and increasingly efficient operations and modernisation driving costs lower, BP now estimates that this growth will enable the Upstream segment to generate $13-14 billion of pre-tax free cash flow by 2021, at oil prices around $55 a barrel.
BP's Downstream segment has delivered $3 billion sustainable reductions in cash costs since 2014 – halving the refining margin needed for the segment to deliver a pre-tax return of 15%.
In its refining and petrochemicals manufacturing businesses, BP expects the Downstream to deliver further performance improvements by continuing to focus on efficiency and operational performance, improving both competitiveness and resilience to the price and margin environment. Underlying earnings from the manufacturing businesses in 2021 are expected to be $2.5 billion higher than in 2014.
BP also expects significant earnings growth from its Downstream marketing businesses, with underlying earnings in 2021 more than $3 billion higher than in 2014. In lubricants, growth is expected to come from increasing the sales mix of premium lubricants, exposure to growth markets and BP and Castrol's differentiated offers, brands and technologies. In BP's fuels marketing activities, particularly retail, growth is expected to come through premium fuels, differentiated convenience partnerships – such as the recent agreement with Woolworths in Australia - and access to growth markets.
Combined with the ongoing focus on simplification and efficiency throughout the segment, BP believes this growth will enable the Downstream to deliver $9-10 billion of pre-tax free cash flow by 2021, with returns of around 20% in 2021.
New business models
Beyond the next five years, BP's strategy also aims to ensure that the company continues to meet the energy demands of a changing world.
BP's Alternative Energy business – comprising US Wind and Brazilian biofuels – is already the largest operated renewables business among oil and gas peer companies and BP is further optimising and improving efficiency to deliver incremental growth. In Wind BP is upgrading some of its existing turbines and, in biofuels, has debottlenecked manufacturing sites to increase production.
BP is also exploring new business models and technologies which may potentially develop into options for material businesses in the future, with investment into venturing in areas such as low-carbon, digital and mobility to incubate and grow options for the future.
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