BP’s (BP) CEO Bob Dudley on Q2 2014 Results – Earnings Call Transcript

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%.

Looking at shareholder distributions, in April we increased the quarterly dividend by 8.3% year-on-year, reflecting our confidence in the delivery of the 10-point plan and growth in operating cash flow over the medium term. The Board will review the dividend again with the third quarter results. Since January 1 this year, we have bought back $2.6 billion of shares, bringing the cumulative total since early 2013 to $8 billion. This concludes our $8 billion buyback program from the proceeds of the sale of our interest in TNK-BP. We intend to use the post-tax proceeds from our current $10 billion divestment program predominantly for shareholder distributions with a bias to share buybacks.

Looking further out to 2018 and to remind you of the outlook we shared with you in March, we remain confident of delivering operating cash flow of $30 billion to $31 billion in 2014. Our first half operating cash delivery of $16.1 billion puts us well on track for the year. Relative to 2013, this reflects the higher expected contribution from major projects in the upstream, the ramp-up of the Whiting refinery, and some reversal of the working capital builds seen in 2012 and 2013. We expect to sustain this significant increase in operating cash flow in 2015 at broadly similar levels to 2014, and then to see steady growth out to 2018.

Growth is driven by the higher cash generating characteristics of our portfolio going forward, both upstream and downstream, as well as by the opportunity to improve efficiency across the group. In the near term, we expect underlying cash costs for the group to remain broadly flat, assuming stable oil and gas prices. Coupled with our intention to keep capital expenditure in a range of $24 billion to $26 billion per annum over the same period, we have a strong platform to grow shareholder distributions. We expect to grow dividend per share progressively in accordance with the growth in underlying operating cash flow from our business over time. We aim to bias surplus cash to further distributions through buybacks or other mechanisms.

Now let me hand you back to Bob.

Bob Dudley – Group Chief Executive Officer

Thank you, Brian. So let me give you a brief update on the main Gulf of Mexico related legal proceedings in the United States.

The first and second phases of the MDL 2179 trial have been completed, and the court yet to rule on either. The third phase has been scheduled to begin on the January 20 next year. This is the penalty phase in which the court will hear evidence regarding the penalty factors set out in the Clean Water Act. Regarding business economic loss claims, the District Court has now approved a new policy that provides for the matching of revenues and expenses in calculating lost profits for business claims. Additionally, we have filed a motion to allow us to seek restitution from claimants who were overpaid as a result of the previous policy. Separately, the Fifth Circuit denied further review of the issue of causation and approval of the settlement and certification of the class. We will now seek Supreme Court review of these issues.

In the meantime business economic loss claim payments have resumed. In the MDL 2185 securities litigation, the trial for the class action is set for May 18 next year subject to the ongoing appeals around certification of the class. BP believes that all of the plaintiffs’ securities claims are meritless and we will continue to vigorously defend against them. As we have said many times, we are determined to pursue fair outcomes in all legal proceedings. BP is committed to protecting the best interests of its shareholders at all times, and therefore we fully intend to stay the course in all matters relating to this litigation. We continue to compartmentalize the management of these activities to avoid distraction to the thousands of BP people and contractors working in our U.S. operations who remain firmly focused on delivering our business objectives.

In Russia, as you are aware, recent geopolitical events have continued to create levels of uncertainty in the region which we monitor closely. At the business level, as you have seen, Rosneft had a good quarter. In June, it held its annual shareholders meeting at which I was reelected to the board, and the Rosneft dividend for 2013 was approved by shareholders. As expected, the dividend was announced as 25% of Rosneft’s IFRS reported earnings, and represented an increase upon that paid for 2012. We received our share of that dividend in the bank last week at just under $700 million after tax.

Turning to the upstream, our primary focus here of course continues to be carrying out operations safely and reliably while delivering the milestones we expect to underpin the growth in operating cash for the long term. Summarizing progress this year starting with active portfolio management, we have announced a total of $3 billion of divestments in the upstream as part of the group’s objective to divest $10 billion of assets before the end of 2015. This includes the sale of a package of Alaskan assets to Hilcorp which will allow us to focus more specifically on maximizing production from Prudhoe Bay and progressing the Alaska LNG opportunity. We have also sold or farmed-down assets to others that are better placed to extract additional value. In the Lower 48, we signed an agreement to sell our interests in the Panhandle West and Texas Hugoton gas fields to Pantera Energy. In the Gulf of Mexico, we farmed-down 17 deepwater exploration leases to Noble Energy, and in the North Sea we have agreed to sell our partner-operated equity in the Erskine field to Serica Energy.

In exploration we expect to participate in between 15 and 17 wells this year. Ten of those have already been completed, resulting in the two significant new discoveries so far in 2014. We are encouraged by the results we are seeing in testing these plays at Orca in Angola and Notus in Egypt, and we are evaluating the others. We continue to access new acreage, and in the second quarter we received regulatory approval of our award of 24 blocks in the March Gulf of Mexico lease sale.

We continue with the steady delivery of new projects. As I mentioned earlier, we have seen five major project start-ups in the first half of the year and our remaining 2014 project start-ups are on track. After a major program of turnarounds in our assets over recent years, we have been able to reduce the number this year, and to put this in perspective, we undertook 47 turnarounds in 2011, 30 in 2012 and 20 in 2013, and have just eight planned this year. We have completed two so far in 2014 with a further six due by the end of the year. Finally, we have now brought 80% of our priority wells for 2014 online, the majority of them on or ahead of schedule. We expect the

2014 priority wells to deliver two-thirds of total new well production.

Looking at major projects in more detail, most recently the TOTAL-operated CLOV project in Angola achieved first oil on June 12, joining this year’s other start-ups, the Na Kika Phase 3 and the Atlantis North expansion in the Gulf of Mexico, and the Shell-operated Mars B in addition to the Chirag oil project in Azerbaijan. We on track with the two further start-ups planned for 2014. In the North Sea, that’s the offshore construction on the Kinnoull project, which is complete and commission is now over 80% complete, and in Canada the Sunrise Phase 1project is on track with construction of the central processing facility over 70% complete. As highlighted at our March strategy presentation, our current year start-ups are particularly high margin and more than double the 2013 upstream segment average, and are expected to deliver significant operating cash flow for us out to 2018.

Looking forward, we continue to work on our quality pipeline of over 50 major projects using a disciplined, centralized and careful process of selecting the right development concepts, optimizing the projects, and then ensuring we are ready to execute. This is clearly the capital discipline that our shareholders expect.

In addition to this momentum on new projects, we are steadily improving the reliability of our operations. We are seeing the result of our investment in turnarounds and systematic defect elimination. Across our operated assets, we have seen average plant reliability of 92% in the first half of 2014. This compares to 91% in the first half of 2013. This is also reflected with strong plant reliability in our higher-margin areas, with the Gulf of Mexico at 93% for the first half of the year, and significant improvements are being seen in Thunder Horse with higher average plant reliability in 2014 than in the previous three years.

In Azerbaijan, another of our key areas, plant reliability has been 99% for the first half of the year and ended the year above 98% in both 2013 and 2012. The North Sea continues to remain an area of focus to further improve higher margin production; that said, there are still good examples of progress there. Valhall in Norway has seen significant improvement in plant reliability from an average of just 57% in 2012 to 93% in the first half of 2014.

Turnarounds are also going well. As I mentioned a moment ago, we have already completed two this year: the Greater Plutonio facilities in Angola and a Tangguh turnaround in Indonesia, both on schedule. Five turnarounds are well underway in the summer weather window with one further turnaround scheduled to be completed by the end of the year.

Turning to wells, our global wells organization is expected to deliver our highest operated production from new wells and interventions since 2010. We have placed eight Gulf of Mexico wells online in the first half of the year, de-risking our 2014 production delivery. We have successfully completed well work intervention programs in the Gulf of Mexico and Trinidad. Drilling performance has continued to improve with non-productive time decreasing through the first half of 2014 after reductions in 2013 over 2012 levels, and all of this is starting to show up in underlying production growth, particularly in the higher-margin regions. Of course, there can be an inherent lag in this process as well as quarterly seasonality to contend with, but we are encouraged by the trend of greater operating efficiency in many of our assets.

In the downstream, we continued to increase heavy crude processing at the Whiting refinery, reaching a peak of 270 thousand barrels per day during the quarter. Also in fuels, our marketing businesses continue enhanced customer offers and building strategic relationships. For example, in June we had our highest ever week of UK shop sales as we continue to expand our convenience network with Marks & Spencer. In Air BP, we have expanded our China international customer airport network from four to 20 locations. We continue to reduce costs and implement efficiency programs across all of our businesses, which are delivering year-on-year improvements despite inflationary pressures.

In addition, we continue to focus on actively managing our portfolio, completing the sale of our specialist lubricants global aviation turbine oils business to Eastman Chemicals in June. The lubricants business was an official sponsor at the FIFA World Cup in Brazil, which proved to be a great platform for promoting the growing premium Castrol brand to a truly global audience.

So let me end today by summing up our central message to you. BP is an increasingly focused oil and gas business, a business with momentum and a business doing exactly what we said we would do. As we’ve gone about shaping BP’s investor proposition, we have listened to shareholders and thought about what we have heard. We know the oil and gas sector still has much to prove. We need to demonstrate that we can control capital and costs, pick the right projects, and then deliver them flawlessly. We have got that message. I hope that’s what you see when you look at today’s results and the direction we are taking in our business.

In short, our priorities are your priorities. We are actively managing our portfolio to maximize value. We are demonstrating capital discipline and we are focusing on efficiency. Looking out to 2018, we aim to deliver growth in sustainable free cash flow to support growing distributions. We plan to do this through material growth in operating cash flow coupled with strong capital discipline. The first half of 2014 has seen the delivery of some significant milestones towards fulfilling the 10-point plan we laid out for 2011 to 2014. In exploration, we have participated in two significant new discoveries and ten completed exploration wells to date, some still being evaluated. We have seen five major upstream project start-ups, all of them in key regions that are strong drivers of operating cash flow for the group. In the downstream, the upgraded Whiting refinery continues its high throughput of heavy crude, and we continue to focus on operating our assets safely, reliably and more efficiently.

So we have two solid quarters behind us this year and a sense of real momentum in our company. I am confident this will support our enduring commitment to grow distributions to shareholders.

Finally, I’d just like to say a few words about our departing downstream Chief Executive, Iain Conn. After 29 years with BP, Iain is leaving the company and will be stepping down from the board by the end of this year. Iain can be enormously proud of the contribution he has made to BP in that time, in particular over the past few years when he transformed BP’s downstream business, focusing its portfolio and strengthening its performance both operationally and financially. He has been an invaluable member of the executive team and for me and the team a great support. He leaves with my very best wishes and he leaves with strong succession.

So, on that note, I’d like to thank you all for listening and now Brian,

Jess and I will be happy to take your questions.

Question and Answer Session

 

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