WILL BP BE ABLE TO SURVIVE?

By: MICHEAL KAUFMAN
Published: Dec 11, 2014 at 4:50 pm EST

The operating cashflow for BP plc (ADR) (NYSE:BP) is expected to grow 5.3% between 2014 and 2017. BP is slightly above Royal Dutch Shell plc’s (ADR) (NYSE:RDS.A) growth rate of 4.1%.There have been several factors that have contributed to low expected growth for the future operating cash flow.

Oil price has dipped 40% since June, with the West Texas Intermediate trading at $61.24 per barrel and the Brent crude trading at $64.56. The falling oil price has led to a decline in the cash flows for oil giants globally. BP has been adversely impacted due to the huge amounts it has paid in fines and settlements. The Californian lawsuit against the company along with the Gulf of Mexico 2010 settlement charges has clearly dampened the company’s liquidity position.

The company is looking to cut down on its costs. It has divested assets worth $43 billion and has decided to cut thousands of jobs across all business segments. The company is now looking forward to a 18-month efficiency program and has decided to focus more on value instead of volume. BP has announced $1 billion restructuring program. Lamar McKay who heads BP’s upstream sector indicated at the company’s investor day on Wednesday that the oil giant will experience a $2 billion decline in next year’s capital expenditure.

The $43 billion assets sold include 12% of the company’s reserves, 50% of the pipelines, and 35% of the wells. While production has dropped 30% since 2009, the number of employees in the upstream sector has increased 13%. This justifies BP’s policy of cutting jobs. This production figure is exclusive of the production from Russia. The company undertakes oil exploration and production activities with Rosneft Oil Co (OTCMKTS:RNFTF) in Russian and is suffering greatly amid the Western sanctions placed.

Critics have questioned the new mantra adopted by the company. Despite the benefits of cost-cutting measures, critics are concerned about BP’s new discoveries which will ensure that the company remains in the super-market bracket.

Investors’ concerns were addressed by Mr. McKay who expects the company to produce more than 900,000 barrels of oil equivalent per day till 2020. Half of the production growth will be associated with the Mad Dog field in the Gulf of Mexico, whose construction is delayed and is expected to start by 2017. Mr. McKay further pointed out that projects like Thunder Horse field and Clair Ridge will help cover the losses BP faced through the 2010 oil spill.

BP stock stood at $37.74, down 2.02%, during the pre-market hours on Thursday. Some analysts still believe the company to have a lot of expertise in deep-water drilling. This coupled with higher margin in the Gulf of Mexico region will allow the company to survive.

SOURCE

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