BP Targets $40 Break-Even Oil Price to Reassure Investors

(Bloomberg) -- BP Plc said it will need a crude price of about $40 a barrel in 2021 to cover spending and dividends, down from $60 this year, as Chief Executive Officer Bob Dudley seeks to reassure investors on the oil major's growth outlook and finances.

The break-even level will fall as BP keeps capital spending at no more than $17 billion a year, the London-based company said Tuesday in a statement. It aims to raise output by 5 percent a year to 2021 and is targeting returns of more than 10 percent.

Dudley, 61, is seeking to return BP to growth after the 2010 Gulf of Mexico oil spill and the market downturn of the past three years shrank the scale of its operations. The CEO must also show investors he'll keep spending in check as crude prices remain at half the levels of 2012 and 2013.

“We can see growth ahead right across the group,” Dudley said in the statement. “While always maintaining our discipline on costs and capital, BP is now getting back to growth -- today, over the medium term and over the very long term.”

BP's shares extended Tuesday's gains to rise as much as 1.9 percent to 462.25 pence in London. The stock is down 9.4 percent this year compared with the 20-company Stoxx Europe 600 Oil & Gas index's 3.1 percent decline.

The company said Feb. 7 that its break-even oil price would rise to $60 a barrel this year from an earlier assumption of as much as $55 because of the cost of buying oil and natural-gas fields in Egypt, Mauritania and Senegal. That meant BP was moving in the opposite direction to Exxon Mobil Corp. and Royal Dutch Shell Plc, which said cash flow already covers spending.

Dudley told investors and analysts on Tuesday the break-even price would steadily drop from this year to $35 to $40 a barrel by 2021.

That guidance and expectations of returns could be optimistic, though the production growth target looks plausible given the pipeline of projects currently under construction, analysts at Raymond James wrote. Despite the skepticism of a balance point at $40, BP has made a strong statement of intent, UBS AG wrote in a report.

Cash Flow

The company also sees as much as $14 billion of free cash flow from its oil and gas exploration and production business by 2021 at an average oil price of $55, Bernard Looney, the unit's boss, said at a briefing in London. That compares with guidance last year of as much as $8 billion of cash flow by 2020 at $50 a barrel, with the increase broken down as follows:

• A little more than $2 billion from new fields BP bought at the end of last year.
• Another $2 billion from higher oil-price expectations.
• Extending the period of guidance by a year to 2021 adds $1 billion.
• Making operations more efficient adds $1 billion

Another $9 billion to $10 billion of free cash flow will come from refining, marketing and trading oil, BP said.

“It's good to see them bring the cash break-even guidance that low, even though it is long-dated,” said Rohan Murphy, an analyst at Allianz Global Investors, which owns 0.6 percent of BP shares. “The jump in upstream free cash flow guidance goes hand in hand with this, but its good to see it quantified and shows the portfolio is stronger than the market gives credit for.”

BP did balance its books toward the end of last year, giving the company confidence to make acquisitions, but the hunt to secure future supply forced it to push back its cash break-even target for 2017 as a whole. The buying spree at the end of 2016 -- taking in fields around Africa that are yet to begin production -- will result in a cash shortfall this year, Chief Financial Officer Brian Gilvary said Feb. 7. BP is not looking for any new big acquisitions, Dudley said.

The company plans to start seven projects this year and is working on nine others that could begin from 2018 to 2021, Looney said. BP sees total production rising by more than 1 million barrels a day by 2021, Dudley said.

To contact the reporter on this story: Rakteem Katakey in London at rkatakey@bloomberg.net.

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Alex Devine