BP - Earnings Call - Q1 2025

Transcript

Craig Marshall (SVP and Head of Investor Relations)

Hello everyone, and thank you for your interest in BP's first quarter 2025 results. Today's video presentation features Murray Auchincloss, Chief Executive Officer, and Kate Thomson, Chief Financial Officer. Before I hand over to Murray, let me draw your attention to our cautionary statement. In this presentation, we will make forward-looking statements that refer to our estimates, plans, and expectations. Actual results and outcomes could differ materially due to factors we note on this slide and in our U.K. and SEC filings. Please refer to our annual report, stock exchange announcement, and SEC filings for more details. These documents are available on our website. Over to you, Murray.

Murray Auchincloss (CEO)

Thanks, Craig. Our capital markets update on the 26th of February marked the start of a new chapter for BP. We laid out a fundamental reset of our strategy, a new direction, and described the actions we are taking to grow long-term shareholder value. We are reallocating capital, investing to grow value in our upstream business. We are driving improved performance in our downstream business as we high-grade around our core integrated markets, and we're investing with discipline in the energy transition. We laid out four primary targets: to grow cash flow and returns, and reduce net debt and costs. We have strong conviction in this plan, and our objective is clear: remain safe as we execute at pace. In the nine weeks that have passed since the market update, we've made great progress, and I'll highlight some examples across our oil and gas business shortly.

As we move through the year, we will provide an update on downstream performance as we look to build on a strong first quarter for operations. Before I move on, I do want to acknowledge the volatile and changing outlook that we've seen recently. Following the introduction of global tariffs and related government responses, there has been increased market volatility driven by rising concerns around the potential impact of a weaker economic outlook. Commodity prices have softened as the market anticipates a potential reduction in demand for oil and gas driven by economic uncertainty. Volatility and lower price cycles are not new to the sector or to BP, and we are continuing to monitor developments closely. We have extensive experience of managing through many price cycles and know how to navigate a weaker environment should we see a sustained period of lower prices.

We are focused on things within our control, delivering our plan, and doing so at pace. We delivered strong operational performance in the quarter with above 96% refining availability, the highest first quarter figure in 24 years. Upstream operating efficiency is at an all-time record, supported by plant reliability above 95%. We are moving at pace on our three-year divestment program while remaining focused on transacting for value. Year-to-date proceeds from completed or signed agreements already exceed $1.5 billion. We announced the partnership with Apollo for the TANAP gas pipeline and are progressing intended divestments of the Gelsenkirchen refinery and our mobility and convenience businesses in Austria and the Netherlands. The strategic review of Castrol is now underway, with the business continuing to perform strongly. We also benefit from a portfolio that is resilient and balanced across production mix, geography, and operating models.

Our integrated business model across upstream and downstream enables us to capture margin up and down the value chain as the market evolves, underpinned by our distinctive supply, trading, and shipping business. In upstream, around a quarter of production is on a production-sharing agreement or equivalent basis, which is less impacted by price changes. Our resources to be developed are competitive, with an average point forward development cost of around $10 per barrel of oil equivalent and a unit production cost of around $6 per barrel to 2027. We are investing with discipline, with CapEx balanced across near-term and longer-term growth opportunities in our portfolio and investments evaluated against a set of balanced criteria, including lower price and margin scenarios.

As we continue to optimize our investment plans and in light of market volatility, we now expect full year 2025 CapEx to be around $14.5 billion, around $500 million lower than previously guided. Within this, organic CapEx is expected to be below $14 billion, excluding the BP Bunge acquisition payment. We continue to see this as the optimal level of spending that enables us to maintain and grow the scale and value of the company. However, in the event of sustainably lower prices, we would expect deflation to become evident across our capital plans, and we see around $2.5 billion of further capital flexibility should we require it. This is equivalent to around $10 per barrel of oil price sensitivity. Finally, safely driving costs lower is a key area of focus across the organization. We continue to make good progress towards our $4 billion-$5 billion structural cost reduction target.

In summary, we have strong conviction in our plan, and we are delivering at pace. Turning then to first quarter results, where we delivered resilient financial performance. Underlying pre-tax earnings were higher quarter on quarter at $4.5 billion, while underlying net income increased to $1.4 billion. Today, we are announcing a dividend per ordinary share of $0.08 and a share buyback of $750 million. Before I hand over to Kate for more on results and the financial frame, I'd like to focus on some recent milestones in our upstream business, which provides me with confidence in our ability to execute and in our growth outlook. As part of our plan to grow the upstream, we expect to start up 10 major projects between 2025 and 2027.

I'm pleased to say that 2025 is off to a great start, with three of these projects now safely started up, delivering production and generating cash flow and returns. The first phase of Cypre, a four-well subsea development in Trinidad, is complete. The second phase, later this year, will add a further three wells. We started up in the Raven Infills project in Egypt, which came online ahead of schedule. Both projects tie back to existing infrastructure, enabling us to optimize capital efficiently. We also recently exported the first LNG shipment from the GTA Phase 1 project in Mauritania, Senegal. This establishes a new LNG hub and, once fully commissioned, is expected to ramp up to around 2.4 million tons of LNG per year. The combined peak net production of these three projects is around 100,000 barrels of oil equivalent per day, with a 2025 contribution of over 50,000.

We've also been busy this quarter as we lay the foundations for future upstream growth. We plan to drill around 40 wells as part of our exploration program over the next three years. This is off to an exceptional start with six discoveries so far this year, including in the Gulf of Mexico, Trinidad, and Egypt, our best quarter for our exploration in a very long time. Many of these can be tied back to fill existing infrastructure, making cycle time to start up much shorter. We are excited about the recent announcement regarding a significant discovery in Namibia's Orange Basin through our joint venture, Azule Energy. We have also made good progress in Iraq and India this quarter. I recently traveled to Baghdad to meet with Iraq's Prime Minister, where the Kirkuk contract was finalized and ratified. Our teams are already mobilized to begin planning early activities.

In India, our recently signed 10-year contract as technical services provider to ONGC's Mumbai High offshore oil field is off to a rapid start, with a new team stood up and in action within 60 days of signing the contract. We have already identified early opportunities to mitigate decline and increase production with ONGC, where we will share in the incremental value. We also recently sanctioned Ginger in Trinidad, a four-well tieback with first gas expected in 2027. At its peak, the development is expected to add around 50,000 barrels of oil equivalent per day net production. These are great examples of how we are in action to strengthen our upstream portfolio. We are starting up projects that provide cash flow and returns today while paving the way to grow our business in the future. I'll now hand over to Kate to take you through our 1Q 2025 financial results.

Kate Thomson (CFO)

Thank you, Murray, and hello, everyone. Let's start with segment performance in the first quarter. The gas and low carbon energy underlying financial result was $1 billion lower than the previous quarter. That largely reflects a weak gas marketing and trading result, lower production, including the impact of divestments, and higher costs, which were mainly non-cash costs. In addition, there was a level of ramp-up costs related to starting up major projects. In oil production and operations, the underlying result was broadly flat compared to the previous quarter, reflecting higher realizations and production and lower exploration write-offs. These factors were offset by lower income from equity-accounted entities and the absence of the benefit of several one-off items in the fourth quarter 2024. In customers and products, the underlying result was around $1 billion higher than the previous quarter.

Looking at the businesses, in customers, the underlying profit was around $100 million higher than the previous quarter, reflecting the benefits of lower costs and stronger midstream performance, partly offset by seasonally lower volumes. In products, the underlying profit was around $800 million higher than the previous quarter, reflecting a lower level of turnaround activity and stronger realized refining margins. The oil trading contribution was average. The group underlying replacement cost profit before interest and tax was $4.5 billion, and after interest and taxes, we reported group underlying replacement cost profit of $1.4 billion. Our underlying effective tax rate increased in the first quarter to 50%. That's higher than the 43% effective tax rate reported a year ago and mainly reflects the change in geographical mix of profits. For the full year, we continue to expect the underlying effective tax rate to be around 40%.

Finally, on costs, I'm pleased to see the progress towards delivering on our cost reduction program, which is one of our four primary targets. Delivering $4 billion-$5 billion of structural cost reductions by 2027 would, at the midpoint, represent around 20% of the 2023 baseline underlying operating expenditure. This is a robust target, and we are moving at pace to deliver the reductions and drive higher operating cash flow. We've reset our culture and our mindset on costs and are focused on safely lowering our cost base whilst continuing to grow the company and seeking to accelerate and exceed wherever we can and make these reductions sustainable as we execute. We'll provide a half-year update on structural cost reductions at our second quarter results.

Turning to cash flow and the balance sheet, operating cash flow of $2.8 billion was around $4.6 billion lower than the previous quarter, largely reflecting a working capital build of $3.4 billion in the first quarter compared to a release in the fourth quarter. The working capital build was driven by seasonal inventory effects, timing of payments, including the annual bonus payments to employees, and also payments related to low carbon assets held for sale. In a similar price environment, we expect around three quarters of the working capital build to reverse through the remainder of the year. The build in working capital contributed to a $4 billion increase in net debt to $27 billion at the end of the first quarter. Divestment proceeds in the quarter were around $300 million, and capital expenditure in the quarter was around $3.6 billion.

The $1.75 billion share buyback program announced with our fourth quarter results was completed on the 25th of April 2025. Now turning to our financial frame that we laid out in February, which we believe provides us with flexibility through cycle. Let me walk you through what this means in practice. In February, we set a capital frame of $13 billion-$15 billion per year to 2027, including in organics, and this remains unchanged. As Murray mentioned, we now expect full year 2025 CapEx to be around $14.5 billion, down from our previous guidance of around $15 billion. We have a clear view on capital flexibility on a line-by-line basis should we need it and if market conditions evolve. Turning to net debt, we remain committed to our target of $14 billion-$18 billion to be achieved by the end of 2027.

As you heard from Murray, we're making good progress on our three-year divestment program, including moving at pace on the strategic review of Castrol. For 2025, we now expect divestment proceeds of $3 billion-$4 billion, which is higher than our prior guidance of around $3 billion, with proceeds still weighted to the second half. As previously mentioned, we also expect the majority of the working capital build in the first quarter to reverse. Now moving on to shareholder distributions. Firstly, our policy is to maintain a resilient dividend, and for the first quarter, we have announced a dividend of $0.08 per ordinary share, unchanged from the previous quarter. Secondly, we remain committed to sharing excess cash through buybacks over time.

It's a policy that enables us to share the upside in cash generation when the price environment is stronger, whilst ensuring the balance sheet remains resilient in a low price environment. As Murray said earlier, today we announced $750 million of share buybacks to be executed by the 2Q results. Looking ahead, we continue to expect to announce buyback decisions at the time of quarterly results. We will, of course, be mindful of both short-term macro volatility and the medium-term outlook for prices across the basket of commodities that drive our cash flow. We have been clear on the importance of our four targets, and we have the flexibility within our financial frame as needed to deliver on these. Turning to guidance and the second quarter, we expect upstream production to be broadly flat compared to the first quarter.

In customers, we expect seasonally higher volumes compared to the first quarter and fuel margins to remain sensitive to movements in the cost of supply. In products, we expect a significantly higher level of planned refinery turnaround activity compared to the first quarter and refining margins to remain sensitive to the economic outlook. Regarding the full year 2025 guidance, except for the reduction to full year CapEx to $14.5 billion and the change to our full year divestment proceeds of $3 billion-$4 billion, we've made no changes to those laid out in February. With that, I'll hand you back to Murray.

Murray Auchincloss (CEO)

Thanks, Kate. To summarize the key points to leave you with today, 1Q delivery was strong, with great quarterly operational performance across the businesses. We have conviction in the plan laid out at our capital markets update in February and in delivering on our four primary financial targets. Our focus on growing cash flow and returns and reducing net debt and costs will drive increased resilience in the face of market volatility and uncertainty. We have a balanced and resilient portfolio and additional interventions available to us should we need to adapt to the environment as we progress. Meanwhile, the team is focused on what we can control: safe, reliable, and strong operations. We have an ambitious growth plan and, make no mistake, we are focused on delivery and doing so at pace, all in service of sustainably delivering long-term shareholder value. Thank you for listening.