BP
to buy back shares with free cash flow when oil price exceeds $20
a barrel
Posted: 29 March 2004
BP said today that, barring unexpected developments – or
acquisitions it does not currently foresee – it expects to
be able to deliver significant extra cash to its shareholders over
the next three years and at the same time strongly grow production
and long-term returns.
Chief executive Lord Browne said that a $20 oil price would allow
the company to meet its capital requirements and pay a progressive
dividend, and that all the free cash generated when the oil price
is above that level would be returned to shareholders through buybacks.
Confirming that BP had already bought back some 155 million shares
for $1.25 billion in the first quarter of 2004 and has today made
special arrangements to continue repurchases during a ‘close’
period, Browne said: “There appears, at present, to be overwhelmingly
more chance of the oil price being above $20 a barrel for the next
few years, than not.”
Previewing a strategy presentation to investors and analysts in
London, Browne said that as well as increasing dividends in line
with improvements in underlying results, BP intends “to distribute
100 per cent of all excess free cash flow to our shareholders, as
part of our determination to provide them with additional returns
through disciplined cash flow management.”
BP has increased its dividends by 6.8 per cent a year in dollar
terms since 1999. It bought back some 775 million of its shares
at a cost of $6 billion between 2000 and end-2003, shrinking its
equity base by 2.5 per cent.
Laying out the Group’s strategy to end-2006, Browne said
BP was in transition from a period of acquisition and consolidation
to a phase of strong organic growth. It intends over the next three
years to focus on performance, particularly cash returns, while
investing at a rate appropriate for long-term growth.
He said capital spending is expected to moderate from the “relatively
high levels” of 2002 and 2003 to some $13.5 billion this year,
$12–$12.5 billion in 2005 and 2006 and $12–$13 billion
beyond 2007, with the company maintaining its five-year rolling
average finding and development cost for oil and gas at between
$4 and $5 a barrel.
BP’s production is expected to grow by five per cent a year
between 2003 and 2008, or some seven per cent if the contribution
of TNK-BP, its Russian joint venture, is included. TNK-BP’s
output alone is set to climb by 12 per cent this year and BP estimates
it will rise a further five per cent annually to 2007.
BP’s oil and gas reserves currently stand at 18.3 billion
barrels of oil and gas equivalent, including its share of TNK-BP.
This compares with a pre-merger figure of 8.6 billion barrels at
end-1997 and includes replacing the Group’s annual production
at an average rate of 153 per cent over the last five years.
In addition, the company has estimated unproved resources of 24
billion barrels, excluding Russia which could contribute a further
13 billion net barrels.
Browne said BP’s positive view of Russia remains unchanged.
“The company’s investment is attractive and self-financing
in the short term but with significant longer term strategic importance
in a region where yet-to-find estimates for the industry exceed
300 billion barrels.”
At an oil price of $20 a barrel BP anticipates TNK-BP can pay dividends
equal to 40 per cent of its net income at the same time as funding
its forward investment programme. “Our estimate is that replacement
operating profit, in a $20-a-barrel environment, divided by our
average capital employed in TNK-BP, will be around 25 per cent on
a steady-state basis.”
Browne said all the ongoing developments in the company’s
five other new profit centres around the world are on track to meet
their first-production dates. The Atlas methanol project in Trinidad,
the Kizomba A field in Angola, Holstein in the Gulf of Mexico, and
the fourth LNG train in Australia’s North West Shelf, are
due on stream this year, as is In Salah gas in Algeria.
Next year will see start-up of the Mad Dog and Thunderhorse fields
in the deepwater Gulf of Mexico, the Azeri field in Azerbaijan,
the fourth LNG train in Trinidad and the In Amenas project in Algeria.
As these and subsequent new upstream projects begin producing,
BP expects to see underlying pre-tax cash returns rise by two per
cent between 2003 and 2006, and an increase in operating capital
employed of some 15 per cent during the same period.
Browne said BP had invested significantly in its customer-facing
businesses – refining and marketing, petrochemicals and gas,
power and renewables – essentially pumping back all the operating
cash flow they had generated in recent years. The average pre-tax
cash return from these businesses combined was some 20 per cent
in 2001 to 2003.
“During their building, these segments produced no surplus
cash flow to the Group and BP’s intention now is to target
them to produce underlying free cash flow in proportion to their
capital employed – at least when compared with the potential
of the upstream business at around $20 oil price,” Browne
said.
In petrochemicals, with cash returns of only 10 per cent, BP will
invest more in ‘advantaged’ products – paraxylene,
PTA and acetyls – which account for some $5 billion of operating
capital employed. These have higher market shares, more proprietary
technology, greater exposure to high-growth Asian markets and better
returns.
BP said capital spending in the olefins and derivatives business
will be held to very low levels and “all options examined
for further improvement in this area”.
Browne said that, while the oil price remains impossible to predict,
the 20-year average for Brent has been some $20 a barrel in nominal
terms. “BP’s view is that it is quite reasonable to
use $20 as a base case for balancing cash flows over the next couple
of years.
“Over time, as production rises and capital spending declines,
we expect the oil price at which cash flows balance to fall below
$20 a barrel.”
The company manages its gearing in the range of 25-30 per cent,
allowing itself headroom to 35 per cent if the oil price falls to
$16 a barrel.
Browne concluded: “As we look at how the company has developed,
we believe BP already holds the assets, market positions and capability
to enable us to go forward, expanding our capital base while maintaining
underlying cash returns at broadly the same average level as in
2001 to 2003, thereby growing the cash flow generated.
“We expect to do this without affecting the financial risk
profile of the Group so that we have sufficient financial capability
to cover a contingency if oil prices dropped to $16 a barrel, maintain
a balance between sources and uses of funds if oil prices are at
$20 a barrel, and to generate cash flows in excess of the financial
needs for long-term growth if oil prices are above this level.
“So, we have three targets:
- First, to underpin growth by a focus on performance, particularly
on cash returns, investing at a rate appropriate for long-term
growth
- Second, to maintain a progressive dividend policy
- And third, to distribute to shareholders 100 per cent of all
free cash flow in excess of operating investment and dividend
needs, generally when the price of oil is above $20 a barrel.
“Back in 1998 when we announced the merger with Amoco, we
were only partly conscious of the chain of events we were setting
in train. It is hard to predict the consequence of any particular
step.
“We feel we are now at a similar point of change. The logic
of restructuring is not just about making companies bigger. It is
about using size and scale to do what was previously unachievable.
“We believe we’re beginning to open that door, and
beginning to be able to deliver a level of return – consistently,
and sustainably year by year – which will improve on anything
we’ve seen so far.”
For more informatin see www.bp.com
Posted by Richard Price,
Editor Pipeline Magazine
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