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BP p.l.c. (BP) Q1 2023 Earnings Call Transcript

BP p.l.c. (BP)

Q1 2023 Earnings Conference Call

Company Participants

Craig Marshall - Head of IR

Murray Auchincloss - CFO

Conference Call Participants

Biraj Borkhataria - RBC

Paul Cheng - Scotiabank

Roger Read - Wells Fargo Roger

Irene Himona - Societe Generale

Christyan Malek - JPMorgan

Oswald Clint - Bernstein & Co.

Peter Low - Redburn

Lydia Rainforth - Barclays

Martjin Rats - Morgan Stanley

Chris Kuplent - Bank of America

Lucas Herrmann - Exane

Michele Della Vigna - Goldman Sachs Group

Jason Kenney - Santander

Amy Wong - Credit Suisse

Henri Patricot - UBS

Henry Tarr - Berenberg

Kim Fustier - HSBC

Alastair Syme - Citi

Presentation

Operator

Welcome to the BP Presentation to the Financial Community Webcast and Conference Call.

I'll now hand over to Craig Marshall, Head of Investor Relations.

Craig Marshall

Good morning, everyone, and welcome to BP's first quarter 2022 results presentation. And I'm here today with Murray Auchincloss, our Chief Financial Officer.

Before we begin today, let me draw your attention to our cautionary statement. During today's presentation, we will make forward-looking statements, including those that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to the factors we note on this slide and in our U.K. and SEC filings. Please refer to our annual report, stock exchange announcement and SEC filings for more details. These documents are available on our website.

I'll now hand over to Murray.

Murray Auchincloss

Thanks, Craig. Hello, everyone, and thanks for joining us. We're here today to report on BP's first quarter 2023 results. First, we continue to deliver resilient operational and financial performance. For the first quarter underlying earnings were $5 billion and we reduce net debt to $21.2 billion.

Second, we are executing against our discipline financial frame, including the announcement of a further 1.75 billion share buyback. And third, we are advancing at pace with our transformation to an integrated energy company. Since reporting fourth quarter results, we have made progress toward our 2025 oil and gas production target with a safe startup of Mad Dog Phase 2 in the Gulf of Mexico. In addition, the KGD6-MJ project offshore India is in the final stages of commissioning. With two wells open to flow gas and full startup expected later this quarter.

We have also further strengthened our resilient oil and gas portfolio. Announcing our intention to form a JV with ADNOC, focused on gas development and international areas of mutual interest, including the Eastern Mediterranean. BP expects to contribute assets to form the JV and this made a non-binding offer with ADNOC to acquire 50% of NewMed Energy.

Advancing our Kaskida project in the Gulf of Mexico to concept selection and agreeing to acquire shells 27% interest in the Browse project offshore Australia subject to approvals. We have agreed to acquire Travel Centers of America, which is expected to almost double our convenience gross margin and provide growth opportunities across four of our five transition growth engines.

We have continued momentum in executing our fast on-the-go and fleets EV charging strategy. This includes a strategic collaboration agreement with Iberdrola, with plans to accelerate the rollout of EV charging infrastructure in Spain and Portugal and new global mobility agreement with Uber.

In the low carbon energy, our hydrogen and CCS strategy is progressing. With the UK Government selecting three BP led projects to proceed to the next stage of development.

Turning to results. In the first quarter, we reported a headline profit of $8.2 billion allowing for post-tax adjusting items of $3.7 billion and an inventory holding loss of $500 million. Our underlying replacement cost profit was $5 billion. Despite the backdrop of lower average commodity prices.

Turning to business group performance compared to the fourth quarter. In gas and low carbon energy, the result benefited from an exceptional gas marketing and trading result, partly offset by lower gas realizations. In oil production and operations, the result reflects lower liquids and gas realizations. In customers and products, the products result reflects a lower level of turnaround activity and a very strong oil trading result partly offset by lower refining margins.

The customers result reflects lower retail fuel margins, partially offset by higher result in Castrol. For the first quarter, BP has announced a dividend of $6.61 per ordinary share payable in the second quarter.

Moving to cash flow. Operating cash flow was $7.6 billion in the first quarter. This includes a working capital build of $1.4 billion after adjusting for inventory holding losses, fair value accounting effects and other adjusting items. The working capital out flow includes the impact of timing of annual incentive payments to employees.

Capital expenditure was $3.6 billion and disposal proceeds were $800 million. During the quarter we repurchase 2.4 billion worth of shares. And the 2.75 billion program announced in the fourth quarter 2022 results was completed on April 28. Despite the working capital build surplus cash flow was $2.3 billion, and that that was reduced to $21.2 billion. Taking into account the cumulative level of an outlook for 2023 surplus cash flow, BP intends to execute a further 1.75 billion buybacks prior to announcing second quarter results.

Looking ahead in the second quarter, we will make a scheduled payment of $1.2 billion relating to the Gulf of Mexico oil spill settlement and subject to shareholder approval we expect to complete the $1.3 billion acquisition of Travel Centers of America.

Turning to our discipline financial frame where our five priorities and our guidance for 2023 are unchanged. A resilient dividend remains our first priority. This is underpinned by a cash balance point of $40 per barrel brand $11 RMM and $3 Henry Hub. Our second priority is to maintain a strong investment grade credit rating. We intend to allocate 40% of 2023 surplus cash flow to further strengthening the balance sheet. Recognizing the significant progress made, we are now on positive outlook with S&P, Moody's and Fitch.

Third and fourth, we will continue to invest with discipline in our transition growth engines and in our oil, gas and refining businesses. Our guidance of $16 billion to $18 billion capital expenditure for 2023 is unchanged. And as a reminder, this includes inorganic capital expenditure. And fifth we remain committed to returning 60% of 2023 surplus cash flow to buybacks subject to maintaining a strong investment grade credit rating.

At around $60 per barrel and subject to the Board's discretion each quarter, we continue to expect to be able to deliver share buybacks of around $4 billion per annum at the lower end of the $14 billion to $18 billion medium term capital expenditure range and have capacity for an annual increase in the dividend per ordinary share of around 4%.

Looking ahead, we remain focused on delivery with strong momentum across our business. First, today's results show that we are performing operationally. We expect around 200 mboe/d of high margin production from nine major projects by 2025. Mad Dog Phase 2 and KGD6- MJ are expected to underpin over one-third of this volume as they ramp up during 2023. With further startups expected this year.

BPX is on track to start up bingo. Its second major Permian processing facility in 3Q '23. This will double BPs operated Permian oil and gas processing capacity, derisking future volume growth. And we expect to grow our equity LNG liquefaction capacity in 2023, supported by major projects startup with further increases in supply driven by third party off takes from coral venture global and the restart of Freeport.

Second, we are transforming, executing our strategy with discipline. We expect the acquisition of Travel Centers of America to close in the second quarter and target around $800 million of EBITDA in 2025. In EV charging, we expect around a two-fold increase in energy sold in 2023 compared to 2022, supported by EV charging infrastructure rollout, increasing utilization of our charge points and strategic partnerships.

In bioenergy. During 2023, we expect to advance one of our five biofuels projects to final investment decision, with a further three moving into front end engineering and design. And then biogas, we are proceeding with the integration of Archaea Energy and executing our project pipeline.

Finally, in hydrogen and renewables and power, we are progressing our global portfolio of projects. We are on track to nearly double our hydrogen pipeline by year-end from 1.8 MTPA at the end of 2022 and to around 3.5 Mtpa and we continue to grow our renewables pipeline. Third, we continue to apply our financial frame with discipline and predictability, remaining focused on delivering long-term value for you, our shareholders.

Thank you for your time. Now let's turn to your questions.

Question-and-Answer Session

Operator

[Operator Instructions].

Craig Marshall

Okay. Thanks again, everybody, for listening. We'll turn to questions and answers now. A usual reminder from me, please, just two questions per person, so we can get a chance to get through everybody. On that note, let's take our first question from Biraj Borkhataria, RBC. Biraj, good morning.

Biraj Borkhataria

Hi, good morning. Thanks for taking my question. First one is one the financial frame. When you're deciding the buyback, I mean in the past, you talked about -- you look at the quarter, but you also do a forward look at the future. If I'm thinking about 2023, first half, you've obviously got the working capital builds, you've got Macondo, you're guiding to higher maintenance and so on. But then in the second half of the year, you got the working capital releases that you talked about.

So from a surplus free cash flow perspective, it's kind of a year of two halves. If I look at the full year in totality, at least on my numbers, there was no need to step down the run rate. But obviously, if you look at H1, then there was -- so just two questions as it relates to that. What time period are you looking at when you're deciding the buyback rate? And secondly, how much of this ties into your comments on the credit rating upgrade because my sense is that this is one way to signal that you're willing to put a bit more cash to the balance sheet in the near term. So that's kind of overall comments on that would be helpful.

And the second question is on Egypt. This is a material position for BP, and we've seen the currency devalued quite significantly in the last few months. So can you just help me broadly understand the implications and how much exposure do you have to local currency versus dollars? And any issues in terms of getting paid there and so on. Thank you.

Murray Auchincloss

Great. Thanks, Biraj. Good morning. Thank you for your questions. First, on Egypt, our contracts are dollar-based. So there's not very much exposure in that space. Overdues come and go over time. There's a bit of an overdue right now, but nothing of any concern for us. I think that's the answer on Egypt.

And then buybacks, maybe just to recite how we think about the financial frame right now. As you all know, we have five priorities. The fifth priority with surplus buyback what we've communicated to the market is that we'll do 60% of surplus to buybacks, and we guide on an annual basis. So our guidance that we provided on February 7 was that at $60 oil, we can do 4 billion in buybacks through the year. And that you could use our rules of thumb, and we gave you CapEx guidance as well of $16 billion to $18 billion in the year.

As you say, Biraj, we calculated the surplus in the first quarter. We had 2.3 billion of surplus, 60% of 2.3 would be 1.5. We lend in a bit given the strong performance that we see moving forward from the upstream project starting up to continued LNG expansion our offtakes to our good trading performance. And so we leaned in a bit. And that's why you got to the 1.75 billion.

Of course, actual buybacks will be $2 billion as we do 250 million of employee offsets as well. So that's how we think about it. We look at it through the year and we account both the surplus that we've accumulated in the past and the outlook for the future. I hope that helps, Biraj.

Craig Marshall

Okay. Thanks, Biraj. We'll take the next question from Paul Cheng, in the U.S. Paul at Scotia. Go ahead.

Paul Cheng

Good morning, guys. Two questions, please. Larry that you guys just signed the purchase agreement with Shell on the France LNG project. Just curious what's the rationale behind given the difficulty to operate in Australia and the return is really going to be better in order for you to increase? And what's the hurdle and the test in order for that project to take hold and to move to the FID?

The second question is on inflation. Can you give us some idea that what you see on the inflation side? And also what's building into your current CapEx? Thank you.

Murray Auchincloss

Great. Thanks, Paul. Bright and early this morning, so I wear the first point of the call in as well. So thanks for joining us. On inflation, we're actually not seeing very much now around the world. There continues to be labor inflation. But as you can imagine, fuel prices are decreasing, raw products are decreasing as well. So we're really not seeing much inflation right now across the sector other than in wages. So I think that's the inflation question.

And then on Browse. Look, to step back to February 7, what we talked about is $8 billion more into our transition growth engines and $8 billion more into our oil and gas operations. The first three years of that will be focused on infill and tiebacks, and that's why we added seven rigs. And then as we look to the second half of the decade, we have 15 potential FIDs that we can move forward.

Cascadia that you heard me talk about earlier as one of those that we've moved into concept select on. And Browse is moving in that direction as well, and we saw the opportunity to deepen and browse, which we thought would be a great opportunity. 13 Tcf of gas. It came at an immaterial price that's within our financial framework. And its gas that's pointed at Asia that needs natural gas moving forward.

From a difficulty perspective, as we've talked through it with our project teams in detail. This isn't normal. This isn't a normal LNG project like the past ones. It's not onshore. It's not near the shore, which has been so tricky. Instead, you'll see fabrication through the operator Woodside done probably offshore in other countries. You've got a pipeline delay.

But it's an offshore pipeline that there's good industry experience around this. And of course, it's going into allege that's available in North West Shelf. So we like the project. We think the returns will be mid-teens that we're happy with. But of course, we need to continue to work with Woodside to optimize that and move it forward. But pleased to be able to do the transaction. I hope that helps, Paul.

Craig Marshall

Thanks, Paul. We'll stay in the U.S. and go to Roger Read at Wells Fargo Roger.

Roger Read

Hey, good morning. And I can guarantee you I was not the first to dial in this morning. I'd like to hit you up, Murray, on a couple of things on the demand side, what you're seeing just so much of the macro right now, what you're seeing in terms of call it, non-U.S. R&M demand, refining and marketing and then I guess, particularly a focus on China?...

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