BP Picks Dividends Over Drilling for Surplus Cash

BP has decided to give shareholders a dividend bump rather than step up spending on its oil and gas operations, even though it has raised its outlook for oil prices over the next several years. The UK major increased its dividend by 4% for the coming quarter, surprising analysts who were expecting BP to hold its regular payout flat. At the same time executives signaled that they saw no need to funnel excess cash into the company's capital spending budget. "No change to our plans," said CEO Bernard Looney when asked on the company's second-quarter earnings call if he was tempted to plow additional cash back into drilling. "We don't plan to increase our investment into [a] high-price world." BP's stance echoes that of its supermajor peers. None of the five largest Western majors opted to increase spending this year, despite an almost universally bullish view on prices (IOD Jul.29'21). Dividends and Buybacks Instead, the group earmarked additional cash flow for dividend increases and share buybacks, as well as debt repayment (IOD Jul.29'21). And Chevron actually cut its capex by $1 billion (IOD Jul.30'21). "I think we know how that story ends," Looney said of ramping up spending to chase higher commodity prices. "So staying disciplined in this space will be good." Instead, BP expects to find a stronger market for legacy assets it plans to sell, Looney said, as well as benefiting from higher cash flows from its existing production after reducing operating costs by $2.5 billion annually. Most of that additional cash will be handed back to investors. Some 60% of surplus cash flow will be allocated to share repurchases alone. BP said it would start with a $1.4 billion share repurchase program and could increase that to $1 billion per quarter, based on the company’s new forecast of an average $60 per barrel price for Brent crude oil through 2035. The remaining 40% of its surplus cash flow will be used to pay down debt. Investors responded strongly to the announcement, sending BP's shares up more than 5% on the day. Rethinking Prices BP now sees oil prices averaging $60 out to 2035. That is up from its assumption coming into this year that prices would remain at around $50 through 2025 before rising to $60 by 2030 (see graph). "The oil price movement that we have done in the near term is a supply-led rather than a demand-led change," Looney said. Opec-plus solidarity and a lack of non-Opec investment, particularly in the US onshore, has caused a tighter-than-expected global oil market, he added. But BP also sees the energy transition accelerating and bringing prices down farther and faster in 2035-50 than it had predicted just a year ago, said CFO Murray Auchincloss. The lower price assumptions for the period after 2035 prompted the company to take a $3 billion write-down on the value of certain upstream assets. Auchincloss said the write-down was split between the company's US onshore BPX business and its conventional upstream portfolio. Noah Brenner, London BP Q2'21 Earnings Results ($ million) Q2'21 Q2'20 %Chg. Q1'21 Revenues $37,598 $20,776 81% $36,492 Operating Cash Flow 5,411 3,737 45 6,109 Income attributable to shareholders 3,116 -16,848 -- 4,667 RC* Income 2,380 -17,657 -- 3,325 Gas & Low Carbon RC Income 1,240 -814 -- 2,270 Oil Production RC Income 2,242 -7,713 -- 1,565 Customers & Products RC Income 827 1,405 -41 656 Rosneft $689 -$61 -- $363 Liquids production (million b/d)*† 1,047 1,365 -23 1,109 Gas production (Bcf/d)*† 6,226 6,725 -7 6,433 Oil and gas output (million boe/d)*† 2,120 2,525 -16% 2,218 *Excludes Rosneft. †IFRS Replacement Cost.