BP to Prioritize Shareholder Returns in 2021

• Higher oil prices and expedited asset sale proceeds have allowed BP to pay down debt sooner than expected, giving it room to buy back its shares and increase capital spending. • Buybacks will take priority over oil and gas capex and incremental energy transition investments as the UK major tries to soften the sting of its 50% dividend cut last year. • Hitting its debt target and resuming buybacks mark two early wins for BP as it attempts to reassure investors it can execute its multipronged and aggressive transition strategy. The Issue BP, which has the highest gearing among the Western majors, had held back on share buybacks and capped capital spending until it reduced its net debt to $35 billion. That target has been achieved ahead of schedule, thanks to Brent crude’s near-75% price recovery since late October and BP’s faster completion of key asset disposals. The company has hinted that share buybacks could return soon, with more details to come later this month. Delivering the Goods Equity analysts are hopeful that BP’s early April update highlighting progress reducing its debt means buybacks could resume as soon as this quarter (IOD Apr.6'21). Such a move would mark a return to a mechanism that BP has relied upon in the past to help support its share price and boost shareholder returns. It was specifically used in recent years to cancel out the share dilution that had come from previous issues of scrip dividends -- where shareholders take shares in lieu of a cash dividend. In 2019, BP repurchased some 235 million shares at a cost of $1.51 billion before ending that buyback program in January 2020 as it had fully offset the impact of the dilution from scrips issued since late 2017 (IOD Feb.5'20). However, the arrival the coronavirus pandemic in early 2020, meant that further buyback programs were out of the question as BP, along with other majors, fought to conserve cash and protect its balance sheet. But now that BP estimates that its net debt figure fell below $35 billion in the first quarter, this opens the way for it to direct 60% of its surplus cash flow toward buybacks. This would be an important step -- showing that the company is delivering on promises made to investors -- because its shareholder returns policy depends on a combination of a rebased dividend of 5.25¢ per share per quarter and buybacks. This variable shareholder returns policy aims to deliver aggregate per share distributions of more than 10¢ per quarter at $55 Brent over the 2021-25 period. The UK major had expected its net debt, which stood at $38.9 billion at end-2020, to actually rise during the first half of 2021, as severance costs, Macondo oil spill disaster payments and money owed to Equinor related to the two companies’ new US offshore wind joint venture piled up. Instead, BP brought forward $4.7 billion in divestment proceeds so that it now expects 2021 asset sale proceeds to hit the top end of its $4 billion-$6 billion targeted range; BP has now agreed or completed transactions valued at $14.7 billion under its 2020-25 $25 billion divestment program. The company also benefited from Brent crude averaging above $60 during the first quarter, compared to roughly $42 during 2020. Key BP Asset Disposals Asset Proceeds 20% stake in Oman's Block 61 $2.4 billion Final payment from petchem