BP Lags Behind Peers as Spending Spree Pushes Back Cash Goalby
Investments in Egypt, Senegal will cause $1 billion shortfall
BP acquisitions suggest change in priorities, Barclays says
BP Plc is falling behind competitors in one crucial measure of its resilience to oil’s slump.
The U.K. company now needs benchmark Brent crude to rise to $60 a barrel this year to be able to fund investments and dividends without borrowing, up from a previous estimate of $50 to $55. That means BP is moving in the opposite direction to Exxon Mobil Corp. and Royal Dutch Shell Plc, which said cash flow already covers spending.
“The 2017 breakeven oil-price guidance is disappointing given the trend to reduce this number in recent years,” said Rohan Murphy, an analyst at Allianz Global Investors, which owns 0.6 percent of BP shares. “Investments come with capex burdens but in the current uncertain environment, increasing the portfolio’s 2017 breakeven seems a step too far.”
BP did balance its books toward the end of last year, giving the company confidence to make acquisitions. But the hunt for security of future supply forced it to push its target back for 2017 as a whole. The buying spree at the end of 2016 -- taking in fields around Africa that are yet to begin production -- will result in a cash shortfall this year, Chief Financial Officer Brian Gilvary said in an interview.
“The new entry into Mauritania, Senegal and Zohr, all of those will require some cash this year and therefore there is a slight imbalance of just over $1 billion,” Gilvary said Tuesday. “Cash that’s required to invest in those for this year” pushes the company’s breakeven oil price to $60, he said.
In December, BP agreed to a $2.2 billion expansion of output in Abu Dhabi and a $916 million investment in fields in Mauritania and Senegal. That was followed by a $1.4 billion acquisition of Australian filling stations. It also snapped up a 10 percent stake in the giant Zohr gas field in Egypt for $375 million in November and a bigger chunk of Indonesia’s Tangguh liquefied natural gas project for $313 million shortly afterward.
The higher breakeven price “reflects increased spending associated with the acquisitions,” said Barclays Plc analyst Lydia Rainforth. “Whilst we understand the rationale behind each of the acquisitions on its own, it does appear that this represents a change in priorities” that could hurt the shares in the near term, she said.
BP dropped 4.1 percent, the most in more than three months, to 457.10 pence in London, extending its decline this year to 10 percent. The Stoxx 600 Oil & Gas Index has fallen 5 percent in the period.
BP’s oil and gas production figures show the need for new projects. Output averaged 2.19 million barrels of oil equivalent a day in the fourth quarter, down 5.5 percent from a year earlier. Cash flow from operations fell 58 percent to $2.4 billion.
Tuesday’s share decline and the company’s estimated breakeven price bring the sustainability of the dividend back into focus. The dividend yield has risen to 7 percent, the highest since Nov. 29, the day before OPEC’s decision to reduce oil production drove up crude prices. Shell is yielding 6.4 percent. A higher yield indicates a bigger risk the payout will be cut.
Gilvary sought to allay concerns, insisting the dividend was “underpinned.” The start of output at new projects will increase cash flow and the balance sheet can cover payouts even if oil remains at $55 a barrel this year, he said.
Like several of its peers, the company reported earnings that missed expectations after income from refining and trading fell. Profit adjusted for one-time items and inventory changes totaled $400 million in the fourth quarter, falling short of the $567.7 million average estimate of analysts. Adjusted downstream profit before interest and tax slid 28 percent to $877 million.
“Almost all of the majors have missed earnings estimates and the big theme for the quarter has been weaker refining,” said Brendan Warn, a London-based analyst at BMO Capital Markets. “Maybe people were expecting things to turn around too soon.”