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High crude oil prices trigger BP’s share buyback Company will use extra cash for stockholders, not increased exploration Larry Persily Petroleum News Government Affairs Editor
Rather than use some of the extra cash flow from high oil prices to boost exploration and production spending, BP p.l.c. will use all of the money to buy back more of its shares, transferring much of the windfall to its stockholders.
“There appears, at present, to be overwhelmingly more chance of the oil price being above $20 a barrel for the next few years, than not,” John Browne, BP’s chief executive officer, said in a statement on the company’s web site.
Expecting prolonged high prices, the company intends “to distribute 100 percent of all excess free cash flow (from prices above $20 per barrel) to our shareholders, as part of our determination to provide them with additional returns,” Browne said.
“It’s a principle of disciplined cash flow,” said spokesman Ian Stewart of BP’s New York City office.
When asked why the company has decided to spend billions buying back shares instead of boosting spending even higher on exploration and production, Stewart answered: “We have chosen to go this way.” He declined to elaborate on the company’s choice, although he said the share buybacks would continue “certainly for the foreseeable future.” $20 oil will cover all of BP’s cash needs The company said it expects to earn sufficient revenue from oil at $20 a barrel to cover all its capital needs — barring acquisitions it does not currently foresee — while also paying a growing dividend. It plans to use all of the extra cash generated at above $20 to buy back more of its shares, directly benefiting stockholders by, hopefully, driving the share price higher.
Putting the additional cash into share buybacks costs the company the same as paying it out in stock dividends, but buying up shares can be better for stockholders, Stewart said. Although income taxes are due the year a stockholder receives a dividend, shareholders can choose to hold on during periods of rising stock values and take their gains when it’s to their advantage, he said.
And it’s not like the company’s dividends are lagging.
Higher-than-normal oil prices of the past few years have helped BP boost its payments to shareholders. The company sent out almost $5.8 billion in dividends last year, an increase from $5.38 billion in 2002 and $4.94 billion in 2001.
And while paying out larger dividends, BP purchased 775 million of its shares at a cost of $6 billion between 2000 and the end of 2003 in a move to boost per-share equity. During that time, its share price started at $50 and bounced around that level before ending 2003 at close to the starting price. Share prices up this year The results are different so far this year. The company purchased an additional 155 million shares in the first quarter, sending share prices higher. After starting the year just below $50, the price climbed to $54.72 on April 16.
The company has almost 3.7 billion shares outstanding, worth $200 billion at $54 each.
BP’s strategy through the end of 2006 will be to move out of the acquisition and consolidation mode and into a time of focusing on performance, particularly building cash returns while still investing in exploration and development for long-term growth, Browne said in the March 29 statement.
The company’s capital spending, which totaled almost $14 billion worldwide in 2003, will slip to $13.5 billion in 2004, Browne said, falling to between $12 billion and $12.5 billion in 2005 and 2006.
At those spending levels, Browne said, the company intends to maintain its five-year rolling average of between $4 and $5 a barrel for finding and developing oil and gas reserves.
BP’s reserves, as of Dec. 31, 2003, totaled 18.3 billion barrels of oil and gas equivalent.
Even with less capital spending, BP’s production is expected to grow by 5 percent a year between 2003 and 2008 — not counting production growth from its Russian joint venture, TNK-BP — the company reported. Its 2003 production averaged 1.9 million barrels of crude oil and 8.6 billion cubic feet of gas per day. Profit centers scattered around the globe Separate from its efforts in Russia, BP’s “new profit centers” are oil and gas projects under way at Kizomba A field in Angola, the In Salah gas field in Algeria, the fourth liquefied natural gas train at Australia’s North West Shelf, Holstein in the Gulf of Mexico and the Atlas methanol project in Trinidad, Browne said. All are due online this year.
Next year’s start-ups will include the Mad Dog and Thunder Horse fields in the deepwater Gulf of Mexico, the Azeri field in Azerbaijan, a fourth LNG train at Trinidad and the In Amenas project in Algeria.
And while it is impossible to predict the price of oil, “BP’s view is that it is quite reasonable to use $20 as a base case for balancing cash flows over the next couple of years,” Browne said.
“Over time, as production rises and capital spending declines, we expect the oil price at which (BP’s) cash flows balance to fall below $20,” he added.
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