BP Breaks Even in ‘Tough Environment’ After Debt Hits Record

  • Net borrowings almost touched $40 billion in second quarter
  • CFO sees improvement in second half as asset sales bring cash

BP 2Q Earnings Beat Estimates as Debt Continues to Climb

BP Plc moved to calm investor concerns after debt rose to a record, saying lower oil-spill payments for the rest of the year and funds from asset sales will ease the burden.

“This year debt is going up exactly in line with payments going out for Macondo,” Chief Financial Officer Brian Gilvary said Tuesday by phone. “And it will come back down commensurately in the second half of the year when disposal proceeds come in.” 

Brian Gilvary

Source: BP Plc

Net borrowings totaled $39.8 billion at the end of June, up almost $9 billion in a year, because of continuing payments for the 2010 Gulf of Mexico disaster. While BP managed to cover dividend and spending commitments with cash flow in the first half, it’ll need stable oil prices to do so over the remainder of the year.

“The thing which is alleviating any concerns is the fact that we’re now cash break-even at below $50 a barrel,” Gilvary said, forecasting prices of $45 to $55 in 2018. “In the first half of the year we were cash break-even at $47 a barrel.”

Several of Europe’s biggest oil companies, all of which made sweeping cost cuts amid oil’s collapse, have signaled a return to growth with earnings above analyst expectations. Royal Dutch Shell Plc generated almost as much cash from operations in the second quarter as it did when crude was above $100. Still, many are relying on disposals and scrip dividends -- payouts in stock -- to free up funds. At BP, the Macondo spill forced Chief Executive Officer Bob Dudley to sell billions of dollars of assets to fund fines and compensation.

The stock rose 3.8 percent to 462.6 pence at 10:42 a.m. in London, paring its decline this year to 9.2 percent. Benchmark Brent crude traded below $53 a barrel, half its level of three years ago.

“It’s a tough environment and could remain that way for some time,” Dudley said on a conference call with analysts.

Cash Growth

Gearing, or net debt to capital, climbed to 28.8 percent in the second quarter from 24.7 percent a year earlier, nearing BP’s 30 percent ceiling. Nevertheless, the company generated $4.9 billion in cash from operations, not far off the levels of 2012 and 2013, when oil prices were much higher.

“Important for us is the cash-flow number,” analysts at Barclays Plc said in a note. “With another four major projects due on-stream in the second half, we expect this cash-flow momentum to continue to build.”

BP plans to start operating its Persephone project in Australia, Juniper in Trinidad & Tobago, Khazzan in Oman and Zohr in Egypt by the end of 2017 -- all natural-gas developments.

Of the $4.5 billion to $5.5 billion BP expects to pay for the Gulf of Mexico accident this year, it paid $4.2 billion in the first half, and says asset sales will cover the cost. As Macondo payments fall to $2 billion next year and $1 billion in 2019, the market will “start to react” to BP’s new projects, Gilvary said.

  • Adjusted net income totaled $684 million, compared with $720 million a year earlier, beating the average analyst estimate of $518.4 million. 
    • A $753 million exploration write-off, flagged in June, weighed on the result.
  • Profit in the upstream, or exploration and production business, totaled $710 million, up from $29 million a year earlier.
  • Oil and gas output was 10 percent higher at 3.54 million barrels a day, in part reflecting a deal to buy into a large concession in Abu Dhabi.
  • The downstream division, which includes refining, marketing and trading, posted income of $1.41 billion, down from $1.51 billion a year earlier.
  • Organic capital spending in the first half was $7.9 billion. BP expects the total spend for 2017 to come in at the lower end of its $15 billion to $17 billion guidance.
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