LONDON (Reuters Breakingviews) - BP’s quest to rejuvenate itself following its 2010 Gulf of Mexico disaster has been a marathon – even after $66 billion in pre-tax charges, the UK oil major is likely to have to pay $3 billion in 2018. But a combination of self-help and higher prices could turn the recovery’s latter stages into a sprint.
Chief Executive Bob Dudley had a decent first quarter. The group’s underlying replacement cost profit, its preferred definition of net income, was over two-thirds higher than the first three months of 2017, whereas other big oil peers have on average seen net profit rise by a third, according to UBS analysts. BP’s production business beat forecasts, helped in particular by gas, and its refining arm also exceeded expectations. Operating cash flow excluding Gulf of Mexico costs and working capital exceeded $3.9 billion of capital expenditure and $1.8 billion of dividend payments.
Dudley’s solid operational performance is a good start, but BP’s main problem of late is the fact that its break-even point – the oil price at which it can generate free cash flow after paying for capital expenditure and dividends – is higher than peers. Including Gulf of Mexico costs but also disposals, BP needed an oil price around $60 a barrel to break even in 2018, according to Macquarie – compared to the mid-$40s for Total and below $40 for Shell.
The good news for Dudley is that without the Gulf of Mexico albatross his break-even price drops to $50. A combination of these costs tapering off and better discipline on more recent projects means that the break-even price should eventually be around $35 to $40. Even so, this isn’t until 2021.
That’s where the recent oil price spike comes in. The combination of a tighter market due to OPEC production cuts and geopolitical tensions means that crude values should average $67 in 2018, according to a Reuters survey of 38 economists and analysts released on Monday. If so, BP should enjoy more free cash flow, and a faster transition from being the poor relation of global oil majors.
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