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Morningstar | BP Is Improving Its Portfolio Through Cost Reductions and High-Margin Growth

The settlement reached with the U.S. federal government and Gulf states in 2016 was a major step for BP in putting the 2010 Deepwater Horizon accident behind it. While BP remains on the hook for $23 billion, to be paid over the next 17 years, the recognition of a reliable estimate for all remaining liabilities removes a key element of uncertainty for the company. With $2.0 billion to be paid in 2019 and about $1.0 billion per year thereafter, the major outlays are behind BP and the company should be able to meet its liabilities with proceeds from targeted asset sales of $2 billion-$3 billion per year, which we view as a rather low hurdle.With that issue largely settled, BP is now turning its focus to positioning itself to compete in a world of lower oil prices. Its first step has been to improve its cost structure and reduce its capital outlays so that it can cover its dividend at $55 per barrel of oil. With that level achieved, we expect break-even levels to continue trending downward to below $50 by 2021.BP has already realized cost reductions of $7 billion, or 20%, from 2014 levels, primarily in the upstream segment, where it reduced the workforce by a third. With the firm already one of the lower-cost producers of its peer group, the cost reductions will improve margins further.Meanwhile, capital spending will fall to $15 billion-$17 billion on average from 2018, a sharp reduction from the peak in 2013 of nearly $25 billion. At this level, BP will continue to invest the least among the peer group for its level of production. However, it will continue to grow through a mix of projects already under construction or nearing completion and those that have qualified for a final investment decision due to cost reduction. In total, BP plans to add 800 thousand barrels of oil equivalent of new gross production capacity by 2020, 85% of which is at least under construction. With these new volumes sporting margins 35% higher than the existing portfolio, BP’s upstream margin should improve further over time.