BP Earnings Call Insights: Outlook and Deep Dive

On Tuesday, BP (NYSE:BP) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look…

Doug Terreson – ISI: Congratulations on your results. My first question is on Russia and specifically the likely tax implications on the divestiture of TNK-BP. Then second, TNK-BP returns on capital were very high in recent years and they were much higher than Rosneft, and so it seems that Rosneft’s management had been pretty confident about the outlook for the combined entity. So Bob, highlighted a few minutes ago that scale and optimization were likely to be pretty significant opportunities, but with Rosneft being one of your biggest investments, I just wanted to see if you could provide your initial expectations for operational over financial performance for the new company that if it’s not too preliminary?

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Robert Dudley – Chief Executive: Doug, this is Bob. There is a couple things, TNK-BP has been a great investment for BP. It’s been a joint ventures to sort of run its course now. It has been very healthy in terms of its dividend flow. It has moved through the Brownfield phase moving more into Greenfield mixture of project, so we did expect the dividend stream to thin out of TNK-BP. Looking at Rosneft, we’ve obviously studied carefully the potential of the Company. We see it has a potential to have a production growth of roughly 4% a year through the decade. I think it’s too early to really be able to project with any greater insight from our team. We think the dividend stream will be probably lower than what we’ve had at TNK-BP, but we do look at the $12.3 billion of cash coming out of TNK-BP. One way to look at is six to eight-year acceleration of dividends from the Company. In terms of the tax on that, the structures to-date, there is – we don’t see a capital gains tax on the payment to us from that sale.

Doug Terreson – ISI: 4% would be very positive.

Jessica Mitchell – Head, Group IR: Hootan Yazhari, Bank of America Merrill Lynch.

Hootan Yazhari – Bank of America Merrill Lynch: A few questions, please. I would like to start with TNK-BP. Obviously, you actually kind of demonstrate this in one of the slides that you have put up which shows the combined TNK and Rosneft entities. It seems like there is a lot of overlap maybe you can give us some preliminary estimates of the sort of synergies you expect this entity to pull out if we assume that Rosneft were to buy 100% of the entity. Next question really is with regards to dividends. We know that the sale of the TNK-BP stake was mildly dilutive to your earnings and there have been suggestions that you would look to mitigate that buybacks. Is today’s increase in dividends instead of that or can you see the coexisting together later on? Then the third question, largely around the refining side. Obviously, you have sold Carson, you have sold Texas City. I just wanted to see in the third quarter how much of this exceptional performance was down to these two refineries?

Robert Dudley – Chief Executive: Thanks for your question about TNK-BP. As it regards to synergies between Rosneft and TNK-BP, should that transaction occur, the way you describe it or the full merger of the two, we would expect there to be some. It’s really a question for Rosneft. I would note that on October 23, Rosneft webcast Igor Sechin said that he hoped to realize some $3 billion to $5 billion of synergies from the acquisition. I know personally from those assets that there is significant industrial synergies, real industrial synergies because of developments that are near each other, that aren’t connected and pipelines planned in different directions. That’s probably a very realistic or a conservative estimate that was made by Rosneft. Let me turn the question to Brian on the dilution. We have been talking to shareholders and also the refining question.

Brian Gilvary – CFO: Specifically on the question around the increase in dividend, that was really as a consequence of the fact that we delivered $11 billion of announcements around divestments in 3Q. We have gone back and reviewed our plans around the 10-point plan for 2014, they are well underpinned, and so with that renew confidence around the cash flow targets, we felt we could comfortably move the dividend 1% early than we had originally planned in terms of the financial frame and that is not in lieu of anything that we choose to do around $12.3 billion of disposal proceeds. So, don’t read across the two things, I mean this is really about confidence in terms of the plans that we have laid out in front of us. We have been talking to shareholders about what we do with that $12.3 billion. As a minimum we calculate the dilution on an earnings per share basis at around 3% to 4%, which would require a reduction in the share base of around $4 billion as a minimum. I think it’s reasonable to say if you have sold $38 billion of assets you’ve shrunk the equity, you should also shrink the share base, so that’s kind of where our attentions are. On the refineries, what they contributed in terms of 3Q just over half of the Downstream result came from the United States in 3Q, but the majority of that result in 3Q came from assets which will be returning the portfolio going forward.

Jessica Mitchell – Head, Group IR: Jason Gammel, Macquarie.

Jason Gammel – Macquarie: First of all I just wanted to ask a question related to Upstream margins and the maintenance program. Bob you mentioned that you would expect the tar amount to be about same in 2013 as 2012. Can I assume that’s number of turnarounds and not necessarily the amount of production that is affected by turnarounds? Then second of all, just as it relates to the Upstream margin. We are forecasting that we’ll see a pretty nice pickup in margins moving forward as a result of the return of Gulf of Mexico, North Sea in particular, but we haven’t really seen that yet. Would you expect 3Q to be, let’s say, an inflection point in the Upstream margin and that we would start to see growth in the margin per barrel in 4Q and forward?

Robert Dudley – Chief Executive: So we’ve said that we expect the number of TARs in 2013 to be about the same as 2012. Some of the numbers we had 47 of them in 2011, we’ve been down to 30 roughly this year. We expect 27 next year, but the number of days, the turnaround days next year in 2013, we expect to be about a third lower than 2012. In terms of the Upstream margins – during the third quarter, we’ve had significant outages, planned maintenance outages in the North Sea, like we’ve said in the North Sea, and also in Alaska. Typically you see the Gulf of Mexico do a lot of its turnarounds in the second quarter and then you have the hurricane season in the second and third quarters. We do expect production to come back on in the fourth quarter and you would expect to see a margin increase in the fourth quarter.

Jessica Mitchell – Head, Group IR: Robert Kessler, Tudor, Pickering, Holt.

Robert Kessler – Tudor, Pickering, Holt: Three quick questions from me. One is the on the Carson refinery sale, how you received first response from the FDC regarding approval for the sale of that asset or that group of assets to Tesoro. Then I suppose somewhat related to that is a medium term CapEx question. Now that you’ve sold a bunch of assets, and in line with your comments around confidence in the dividend, can you give us a medium term CapEx number ex-divestments? Then finally in the Gulf of Mexico, thanks for the color Thunder Horse and the timing around the 2014 water injection project. That was something I was wondering seeing this queue of injector well approvals you’ve received. I also see a number of producer well approvals and I’m wondering and few of those have already been pre-drilled. So I’m wondering is – if you’re queuing up producers to the point that you start the injection or might we see some producer wells come on line before the 2014 water injection program?

Robert Dudley – Chief Executive: Okay, Robert, you go to whole menu there of questions. So on Carson, yes, we have received the first response, I think, as often happens, it’s a long list of questions for us and doubt to Tesoro to answer, so we are working through very long set of responses and questions there. In terms of CapEx going forward, we were in the $22 billion to $23 billion range of CapEx this year. Brian, do you want to comment?

Brian Gilvary – CFO: In terms of medium-term around the 10-point plan, we see the gross CapEx out the 2014 to be round $24 billion to $25 billion. So in terms medium term, it’s around $24 billion to $25 billion and that’s consistent what we said around 10-point plan.

Robert Dudley – Chief Executive: On your question about Thunder Horse and rigs, let me give you just sort of broad description of the rig activity overall. We’ve got seven rigs now running the Gulf of Mexico another eighth one there. We look at even bringing on another one next year. We have two on Thunder Horse. We had two on Na Kika and two on Atlantis that are doing primarily productive well work we have one on the Kaskida appraisal well which is going down right now. I think in figure 2013 you’ll see us with the injection wells, you’ll see us having to take down the facility for a while to be able to tie in the new facilities in there and I think is what we regardless sort of beginning of redevelopment of Thunder Horse. We’ve produced about 15% of the resources still there with 85% yet to go this is a project for the next decade that will probably see its low point as we’re doing this reinjection work and then it’ll come back strong through the decade. I am not sure if I answered your specific question.

Robert Kessler – Tudor, Pickering, Holt: Can I just clarify, on the Thunder Horse rigs, those are – you would have two independent floaters in addition to the drilling capability that you have got on the Thunder Horse platform, is that correct?

Robert Dudley – Chief Executive: We’ve got two working on the Thunder Horse platform itself. We are looking at redevelopment of Thunder Horse that would take out the floaters and do other work out in that field, whether that’s ’13 or ’14 or ’15, we are still looking at the investment case, which does look strong.

Jessica Mitchell – Head, Group IR: Elliston Simon, Citi.

Elliston Simon – Citi: Can I just ask on TNK-Resneft again, I mean having so carefully realigned E&P around where you think you can add value, I wonder whether you think BP can bring anything operational to the Rosneft structure? If the answer is only financial investment, I wonder how you would compare the value of the Rosneft equity to your own equity.

Robert Dudley – Chief Executive: Elliston, we have been very careful during this transaction working with Rosneft to be clear that this was a divestment of our interest in TNK-BP and all cash transaction is just simply not possible. One of the objectives through this was to remain with a solid position in Russia, which we look at as great oil and gas province for decades to come. So, this step was conversion with equity, Rosneft equity. We know Russia well. We see that Rosneft has many opportunities to increase efficiency that can increase the value of that company, and we hope to be able to provide suggestions through our role in the Board, and that’s probably about all we can say now.

Jessica Mitchell – Head, Group IR: Peter Hutton, RBC.

Peter Hutton – RBC: Just a couple of quick questions. Can you quantify the impact of the Alaska maintenance in the second quarter. I’m just trying to get some of the summing of what the turnaround impact was on the Gulf of Mexico. Also on the list of projects that you’ve got coming through to 2014, can you just give an indication as to – of those – given the ramp-up; in other words, there are sort of towards the end of that period, what the volume of production in 2014 is likely to be from the sum total of those projects?

Robert Dudley – Chief Executive: So, Peter, your question is very detailed one about Alaska and the turnarounds in the Gulf, and I think it’s probably best if you get back to IR – our IR team, and they’ll be able to give you what we can in terms of making sure it’s not selective disclosure. And we have been very careful not to give guidance on specific production rates from these projects and the overall production for the Company. Those 15 projects which coming on; three around now already, I can just say that the margins from those projects would be double; the average margin of our Upstream portfolio, but as they come on, we’ll lay out production volumes from the projects as they come on. But I think, Peter, we’re not going to be able to lay those out in the detail you’d like.