While BP remains accountable for $23 billion, to be paid over the next 17 years, shareholders are given a positive forward look to the future
The U.S. federal government and Gulf states reached the settlement figure in 2016. It was a major step for BP in putting the 2010 Deepwater Horizon accident behind it. While BP remains accountable 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 outlays of about $3 billion due in 2018, $2 billion in 2019, and about $1 billion per year thereafter, BP should be able to meet its liabilities with proceeds from targeted asset sales of $2 billion-$3 billion per year.
Now that the issue is largely settled, BP can now turn its focus to positioning the company to compete in a world of lower oil prices. Its first step is to improve its cost structure and reduce its capital outlays so that it can cover its dividend at $50 per barrel of oil in 2018.
BP has already realised cost reductions of $7 billion, or 20%, from 2014 levels. These savings were primarily made in the upstream segment, as they reduced the workforce by a third. With the firm already one of the lower-cost producers, the cost reductions will improve margins further.
BP will continue to grow through a mix of projects already under construction or nearing completion.
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.