London — BP sees continued headwinds from COVID-19 related oil demand impacts in early 2021 but said it is making progress in cutting costs and debt as it pivots to becoming an integrated energy major and shrinking its oil and gas production.
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Reporting a small adjusted profit of $115 million for the fourth quarter of 2020, BP said it expects further pain in its downstream business as a result of the pandemic, after a year that saw its retail fuel sales slump 14% overall and refining margins briefly turn negative. It said January retail volumes were down by around 20% year on year, compared with a decline of 11% in the fourth quarter.
"In the first quarter of 2021 we expect material impacts in downstream as a result of the pandemic, with increased COVID-19 restrictions resulting in lower product demand. We expect industry refining margins and utilization to remain under pressure," BP said.
Refinery utilization for the full year was around 6% lower than 2019 due to the impact of COVID-19, with refining margins remaining extremely weak.
BP's refining marker margin fell to $5.9/b in the quarter, below the average $6.7/b in 2020 and well below the $12.4/b in the year-ago period.
Looking ahead, BP said it still expects oil demand to recover in 2021 but added that the pace and degree of the rebound depend on governments' policies and vaccine roll-outs.
"Looking forward...I'm optimistic, particularly given the vaccines but also because of the actions that we have taken across the company." BP's CEO Bernard Looney said in a call with analysts.
BP, which last year unveiled a radical change of strategy including a 40% cut in hydrocarbon production over the next decade, said it expects to report lower oil and gas production this year due to the impact of its ongoing divestment program.
Underlying production, however, will be slightly higher than 2020 due to the ramp-up of major projects, primarily in gas regions, partly offset by the impacts of reduced capital investment and declines in lower-margin gas assets, it said.
BP's reported production for the fourth quarter was 2.15 million b/d of oil equivalent, 20.1% lower than the fourth quarter of 2019, reflecting the impact of divestments mainly in BPX Energy and Alaska. First-quarter 2021 reported production, however, is expected to be slightly higher than fourth-quarter 2020, BP said.
Production capacity at BP's major projects is expected to hit 900,000 boe/d this year, Looney said, with four more projects scheduled to start up in 2021 including Oman's giant Ghazeer gas field and Raven gas development in Egypt. The company plans to sustain that level of production from its 29 "major" projects until at least 2025. Despite falling headline production volumes, BP expects to grow its pre-tax earnings to 2025, largely by so-called portfolio "high-grading" to focus on lower-cost, higher-margin upstream projects.
"Simply put, we can do more with less, driving capital productivity, as we concentrate on near-field opportunities and manage our business towards a lower, more efficient reserves to production ratio of around eight years," Looney said.
By 2025, BP expects eight core positions to account for over 80% of production and pre-tax earnings. The core regions are the Gulf of Mexico, Angola, North Sea, Asia, US shale, Azerbaijan-Georgia-Turkey, Middle East, and North Africa.
BP's is targeting a 20% boost in oil and gas unit margins as it reallocates spending on high-margin projects while selling its lower performance assets.
Looney said BP is on track to deliver $1.5 billion of savings from its hydrocarbon business by 2023 and is already close to hitting a production cost target of $6/b with its portfolio.
Following the sale of a stake in Oman's Block 61 for $2.6 billion announced Feb. 1, BP said it has now completed or agreed on transactions for over half of its target of $25 billion in proceeds by 2025. It said it now expects proceeds from divestments and other disposals of $4-6 billion in 2021, weighted toward the second half.
BP also reported a rare negative reserve-replacement ratio for the year, after its reserves shrank by a factor higher than actual production, reflecting the impact of the asset sales. Including acquisitions and divestments, BP said its total reserves-replacement ratio in 2020 was minus 5%. Excluding portfolio changes, its organic reserves-replacement ratio was 78% for the year.
For the fourth quarter of 2020, BP's underlying replacement cost profit was $115 million, up from $86 million in the previous quarter, but down from $2.57 billion from a year ago.
The adjusted result missed consensus forecasts of $300 million for the quarter and BP's shares fell by up to 4.5% in early European trading.
The weak performance reflected the lower marketing performance in the downstream and "significantly weaker" result in gas marketing and trading due to warmer than expected temperatures in the US and colder than average winter weather in Asia.
Higher exploration write-offs, partially offset by a higher contribution from its partnership with Russia's Rosneft and a lower underlying tax charge.
Looking ahead, BP said it sees the US gas market tightening in 2021 as supply declines and demand for LNG exports recovers.
"The current tightness on global LNG markets and higher US gas prices will lift other regional gas prices," BP said.
On costs, BP said it has achieved over half of the 10,000 company-wide staff layoffs announced last year. At year-end, BP's net debt was $39 billion, down $1.4 billion over the quarter and $6.5 billion over the full year. BP said it remains on track to meet its net-debt target of $35 billion between the fourth quarter of 2021 and first quarter of 2022.
For the full year, BP reported a loss of $5.7 billion compared to $10 billion profit in 2019, driven by lower oil and gas prices, significant exploration write-offs, weak refining margins and depressed demand.