Source: Seeking Alpha
BP P.L.C. (NYSE:BP)
Q2 2014 Earnings Conference Call
July 29, 2014 9:00 am ET
Bob Dudley – Group Chief Executive Officer
Brian Gilvary – Group Chief Financial Officer
Jessica Mitchell – Head of Global Investor Relations
Oswald Clint – Sanford Bernstein
Doug Terreson – ISI
Michele della Vigna – Goldman Sachs
Blake Fernandez – Howard Weil
Jon Rigby – UBS
Iain Armstrong – Brewin Dolphin
Guy Baber – Simmons & Co.
Theepan Jothilingam – Nomura
Anish Kapadia – Tudor Pickering Holt
Alastair Syme – Citibank
Lydia Rainforth – Bar Cap
Stephen Simko – Morningstar
Thomas Adolf – Credit Suisse
Bertrand Hodee – Raymond James
Gordon Gray – HSBC
Irene Himona – SocGen
Martijn Rats – Morgan Stanley
Chris Coupland – Bank of America Merrill Lynch
Fred Lucas – JPMorgan
Lucas Herrmann – Deutsche Bank
Richard Griffith – Canaccord Genuity
Neill Morton – Investec
Welcome to the BP presentation to the financial community webcast and conference call. I now hand over to Jessica Mitchell, Head of Investor Relations.
Jessica Mitchell – Head of Global Investor Relations
Hello and welcome. This is BP’s Second Quarter 2014 Results webcast and conference call. I’m Jess Mitchell, BP’s Head of Investor Relations, and I’m here with our Group Chief Executive, Bob Dudley; and our Chief Financial Officer, Brian Gilvary.
Before we start, I need to draw your attention to our cautionary statement. During today’s presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors that we note on this slide and in our U.K. and SEC filings. Please refer to our annual report, stock exchange announcement and SEC filings for more details. These documents are available on our website.
Thank you, and now, over to Bob.
Bob Dudley – Group Chief Executive Officer
Thank you, Jess. Hello everyone and wherever you are in the world, I’d like to thank you for joining us today. It’s been another active and, I think, a successful quarter at BP. We continue to move with momentum towards our key goals, not least our commitment to delivering the 10-point plan we first laid out to you in 2011. The demonstration of this is in the stronger underlying earnings and operating cash flow you are seeing in our results today compared to a year ago. We continue to ramp up the new major projects that drive delivery of the $30 billion to $31 billion of operating cash flow planned for this year, so we remain confident of achieving this goal. At the same time, we are firmly focused on safe, reliable and increasing efficient operations.
Earlier this year, we also set out our longer term proposition covering the period out to 2018. As you will recall, we said that we intend to grow sustainable free cash flow through a combination of material growth and operating cash flow and capital discipline with the intention of growing distributions to shareholders. Today you will also see the consistent progress towards the milestones that support the delivery of this plan.
Turning to today’s agenda, I will start off with the headlines for the group in the first half and then Brian will take us through the results for the second quarter along with a reminder of our financial framework and guidance. I will then give a brief update on the ongoing legal proceedings in the U.S. before a note on Rosneft and a look in more detail at the first half highlights from our upstream and downstream businesses. Finally, there will be time at the end for questions.
Let me start with an overview of progress in the first half of 2014, beginning with the portfolio. Having completed the $38 billion divestment program in 2013, we announced a further $10 billion of divestments by the end of 2015 and we have now agreed $3.4 billion of this $10 billion program and continue to look at other ways of actively managing our portfolio to generate value.
You saw this in the announcement we made in March regarding the separation of our U.S. Lower 48 business, and we have already made a start on defining an operating model for the new business and are busy transitioning to a new streamlined organizational structure. We have also signed a lease on new office premises in Houston for the Lower 48 business.
In the upstream, we have participated in the completion of 10 exploration wells this year with two significant discoveries, one at Orca in Angola and the other at Notus in Egypt. Five new upstream major projects have come online it the first half of the year, all in key regions for us. At the same time, we have a number of big projects ramping up, helping to drive operating cash flow growth in 2014 and beyond. We also continue to demonstrate quality in our operations as seen through our increased levels of plant reliability.
In the downstream, the modernized Whiting refinery is up and running heavy crude, and we have continued to focus the portfolio on advantage assets and high-quality products in growth markets. BP has also signed some important deals in the second quarter, notably a heads of agreement with CNOOC, the Chinese National Offshore Oil Corporation, for a 20-year LNG supply contract, so progress is visible and all of this supports our longer-term commitment to growing distributions.
In April, we announced an 8.3% year-on-year increase in the quarterly dividend, demonstrating our confidence to keep this momentum through the remainder of the year and beyond. We have also, as promised, bought back $8 billion worth of our own shares since the start of 2013, completing the buybacks associated with the proceeds from the sale of our interest in TNK-BP. The buyback program will continue, as Brian will come to later, supported by the current program of divestments.
So let me now hand over to Brian to take you through the numbers in detail.
Brian Gilvary – Group Chief Financial Officer
Thanks Bob. BP’s underlying replacement cost profit in the second quarter was $3.6 billion, up 34% on the same period a year ago and 13% higher than the first quarter of 2014. Compared to a year ago, the result reflects increased upstream production in higher-margin areas, a stronger contribution from Rosneft, the return and ramp-up of the modernised Whiting refinery, and stronger oil and gas realisations. These effects were partly offset by higher DD&A, a significantly weaker downstream environment, a lower contribution from supply and trading, and the impact of divestments. Second quarter operating cash flow was $7.9 billion.
Turning to the highlights at a segment level, in the upstream the underlying second quarter replacement cost profit before interest and tax of $4.7 billion compares with $4.3 billion a year ago and $4.4 billion in the first quarter of 2014. Compared to the second quarter of 2013, the result reflects increased production in higher-margin areas, primarily the Gulf of Mexico, and higher liquids and gas realisations partly offset by higher DD&A and well work costs and the impact of divestments. Excluding Russia, second quarter reported production versus a year ago was 6% lower primarily due to the Abu Dhabi onshore concession expiry in January and the impact of divestments. After adjusting for these factors and entitlement impacts, underlying production increased by 3.1%.
Compared to the first quarter, the result reflects increased production in higher-margin areas and lower exploration write-offs partly offset by a lower gas marketing and trading result following strong first quarter performance and lower gas realisations. Looking ahead, we expect third quarter 2014 reported production to be lower than the second quarter, primarily reflecting planned major turnaround and seasonal maintenance activities in Alaska and the Gulf of Mexico. We expect the seasonal reduction to be slightly larger than we experienced in the same quarter of 2013 due to phasing of these activities.
BP’s share of Rosneft underlying net income was $1 billion in the second quarter compared to $220 million a year ago and $270 million in the first quarter. The second quarter result benefited primarily from foreign exchange impacts. BP’s share of Rosneft production for the second quarter was 988,000 barrels of oil equivalent per day, an increase of 5% compared with a year ago. On June 27, Rosneft’s annual shareholders meeting approved an annual dividend of 12.85 roubles per share in respect of 2013 earnings. On the July 22, we received our share of this dividend which amounted to $690 million net of taxes.
In the downstream, the second quarter underlying replacement cost profit before interest and tax was $730 million compared with $1.2 billion a year ago and $1 billion in the first quarter. The fuels business reported an underlying replacement cost profit before interest and tax of $520 million in the second quarter, compared with $850 million in the same quarter last year. The decrease reflects a significantly weaker refining environment and a weaker contribution from supply and trading partly offset by significantly higher throughput and processing of heavy crude at Whiting from both the new units, which are now onstream, and the absence of last year’s planned outage for most of the second quarter.
The lubricants business reported an underlying replacement cost profit before interest and tax of $310 million compared with $370 million in the same quarter last year. The decrease was mainly due to the impact of restructuring programs and foreign exchange effects.
The petrochemicals business reported an underlying replacement cost loss of $100 million in the second quarter of 2014 compared to a loss of $20 million in the same period last year. The decrease was mainly due to oversupply in the aromatics market. Looking to the third quarter, in the fuels business we expect stronger margin capture relative to the second quarter driven by a lower level of turnarounds and Whiting operations. In the petrochemicals business, the challenging environment is expected to continue but we should benefit from a lower level of turnarounds in that business.
In other business and corporate, we reported a pre-tax underlying replacement cost charge of $440 million for the second quarter, in line with guidance, and the underlying effective tax rate for the second quarter was 33%.
The charge for the Gulf of Mexico oil spill was $260 million in the second quarter, primarily reflecting an increase in the provision for future litigation relating to the spill. The total cumulative pre-tax charge for the incident to date is now $43 billion. The charge does not include any provision for future business economic loss claims that are yet to be received, processed and paid. Bob will provide an update on the legal process shortly, but as we have previously advised, it is still not possible to reliably estimate the remaining liability for business economic loss claims. We will revisit this each quarter, as we continue to contest what we consider to be unreasonable claims, a process which could take some time.
The pre-tax cash outflow on costs related to the oil spill for the second quarter was $170 million. The cumulative amount estimated to be paid from the trust fund was $19.3 billion, leaving unallocated headroom available for further expenditures of around $700 million. In the event that the headroom is fully utilised, subsequent additional costs will be charged to the income statement as they arise.
At the end of the quarter, the aggregate remaining cash balances in the trust and qualified settlement funds was $6.3 billion, with $20 billion paid in and $13.7 billion paid out, and as indicated in previous quarters, we continue to believe that BP was not grossly negligent and have taken the charge against income on that basis.
Turning to divestments, as Bob noted, following the completion of our $38 billion divestment program and the sale of our share of TNK-BP to Rosneft in 2013, we continue to actively manage the portfolio. In October we announced plans to divest a further $10 billion of assets by the end of 2015. We have signed deals worth around $400 million during the second quarter, bringing the total agreed against this $10 billion commitment to $3.4 billion. Most notably this includes the sale of a package of assets on the Alaskan north slope, the farm-out of 40% of our interest in the Oman-Khazzan project, and the sale of our Texas Hugoton and Panhandle West gas assets to Pantera Energy.
Moving now to cash flow, this slide compares our sources and uses of cash in the first half of 2014 to the same period a year ago. Operating cash flow in the first half was $16.1 billion, of which $7.9 billion was generated in the second quarter. Excluding oil spill related outgoings, the first half underlying cash flow of $17 billion was $6.8 billion higher than a year ago. Organic capital expenditure was $11 billion in the first half and $5.6 billion in the second quarter. We received divestment proceeds of $1.8 billion in the first half of 2014, including $800 million in the second quarter, and in the first half of the year we have bought back $2.4 billion of shares, including $500 million in the second quarter.
Net debt at the end of the second quarter was $24.4 billion with gearing of 15.5% compared to 12.3% a year ago. This largely reflects the impact of our share buyback program over the course of the year. Our intention remains to keep gearing in a target band of 10 to 20% while uncertainties remain.
Our guidance for the full year remains unchanged, as outlined to you in February. We expect full year underlying production to grow compared to 2013 after adjusting for the impacts of the Abu Dhabi onshore concession expiry and divestments. This increase is mainly driven by the start-up of major projects. As mentioned, organic capital expenditure in the first half of 2014 was $11 billion and we expect the full year to be around $24 billion to $25 billion. DD&A for the first half of 2014 was $7.3 billion and we expect the full year figure to be around $1 billion higher than 2013. Other business and corporate charges are expected to average $400 million to $500 million per quarter and we continue to expect the full year effective tax rate to be around 35%.