FUEL FOR PROJECFUEL FOR PROJECTS
BP raises breakeven oil price to about $60 a barrel to fund new investments
London — BP is falling behind competitors in one crucial measure of its resilience to oil’s slump. The British 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 a barrel.
That means BP is moving in the opposite direction to Exxon Mobil and Royal Dutch Shell, which said cash flow already covered 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% 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 towards the end of 2016, 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 across Africa that were yet to begin production — would result in a cash shortfall in 2017, chief financial officer Brian Gilvary said.
"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 $1bn," Gilvary said on Tuesday.
"Cash that’s required to invest in those for this year" pushes the company’s breakeven oil price to $60."
In December, BP agreed to a $2.2bn expansion of output in Abu Dhabi and a $916m investment in fields in Mauritania and Senegal. That was followed by a $1.4bn acquisition of Australian filling stations. It also snapped up a 10% stake in the giant Zohr gas field in Egypt for $375m in November and a bigger chunk of Indonesia’s Tangguh liquefied natural gas project for $313m shortly afterwards.
The higher breakeven price "reflects increased spending associated with the acquisitions", said Barclays 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 as much as 3.2% in trading on Tuesday and was down 2.7% at 463.5p, extending its decline for 2017 to 9%. The Stoxx 600 Oil & Gas index has fallen 4.4% 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% from a year earlier.
Cash flow from operations fell 58% to $2.4bn.
Tuesday’s share decline and its estimated breakeven price bring the sustainability of the dividend back into focus. The dividend yield has risen to 7%, the highest since November 29, the day before oil cartel Opec’s decision to reduce oil production drove up crude prices.
Gilvary sought to allay concerns, insisting the dividend was "underpinned". The start of output at new projects would increase cash flow and the balance sheet could cover payouts even if oil remained at $55 a barrel in 2017, he said.
Like several of its peers, BP reported earnings that missed expectations after income from refining and trading fell. "Almost all of the majors have missed earnings estimates and the big theme for the quarter has been weaker refining," said Brendan Warn, an analyst at BMO Capital Markets.