Oil giant BP today reported a full year profit of $115 million in 2016, compared to a loss of $6.5 billion in 2015, which was caused largely as a result of compensation costs from the fatal Deepwater Horizon blow-out in the Gulf of Mexico.
BP took another charge of $799 miliion for the Deepwater Horizon disaster, in which 11 people died, bringing total costs to $62.6 billion.
And in the last quarter of 2016, BP profits doubled on the back of slightly higher oil prices and more cost-cutting. Underlying replacement cost profit – the company’s preferred measure of profits – was $400 million for the three month period, up from $196 million in 2015.
Chief Executive Bob Dudley said that the costs and liabilities from the fatal Deepwater Horizon oil platform disaster were “now substantially behind us – BP is fully focused on the future”.
BP said it would balance its books at an oil price of around $60-barrel by the end of 2017. BP – like many other oil companies – has been selling assets, cutting costs and reducing capital expenditure and investment to adjust to lower prices.
Its cash costs were $7 billion lower than 2014, delivered a year ahead of schedule, while organic capital spending totalled $16 billion compared to $17-19 billion in initial guidance. N. Sea Brent crude, the international benchmark, averaged a price of $44-barrel last year, the lowest in 12 years.
Dudley added: “We have delivered solid results in tough conditions – and are well prepared for any volatility in oil pricing. We have adapted by cutting our controllable cash costs by $7 billion from 2014 – a full year earlier than planned. Continued tight discipline on costs remains essential.
“Everything we have done during the year has made us a more resilient and competitive company.
“We start this year with considerable momentum – and a sense of disciplined ambition. We have laid the foundations for BP to be back to growth.”
See also; 24 Jan 2017
EnQuest’s agreement to take over operatorship of Magnus, SVT and associated infrastructure from BP is a material operational undertaking, especially when considered in parallel with commissioning and ramp-up of production at Kraken, writes Sanjeev Bahl, a member of the Oil and Gas Research Team at Edison Investments.
The transaction will involve EnQuest taking on several hundred onshore and offshore staff and contractors. With this in mind, EnQuest’s staged approach, which involves taking on just 25% of Magnus and an additional 3% of SVT at the outset, appears to be sensible.
EnQuest has until 15 January 2019 to exercise its option over an additional 75% of Magnus and related transaction assets, giving it time to understand the operational complexities as well as study decommissioning options before taking on risk.
The net economics of the transaction (and net NAV impact) will be largely driven by EnQuest’s ability to reduce op-ex costs from current levels (we estimate that these may currently be around current spot oil prices) by increasing oil production and production efficiency, increasing oil recovery (significant potential exists in the Kimmeride Clay where current oil recovery is just 30%) and through deferring and reducing decommissioning costs.
From an op-ex perspective there is a material opportunity to reduce Magnus onshore costs and overheads, as well leverage logistical synergies (supply vessels and helicopters) to bring down costs closer to group levels (c$25- barrel).
Depending on the tax structure of the deal it does sound like BP is benefitting from EnQuest’s fortunate tax position (we do not expect EnQuest to pay cash tax on Magnus).
BP is divesting an asset while still receiving a significant percentage of transaction asset cash flows in the early years that are protected from cash tax through EnQuest’s historic tax shield.
The transaction highlights EnQuest’s confidence in its ability to drive the recommendations of the Wood Review, maximising economic recovery from late life assets, and the use of innovative transaction structures to facilitate the transfer of mature assets from the hands of the majors to ‘leaner’ operators.
EnQuest analyst NAV upgrades are understandable, but we expect there to be significant uncertainty over the pace of opex reductions as well and the timing/cost of decommissioning (we believe the gross decommissioning cost for Magnus and the transaction assets could be well over $700 million), which will ultimately drive net economics.
With EnQuest now on the verge of producing over 50kboe/d we expect management focus to shift from growth to operational execution to extract maximum value from its expansive asset/resource base.