The London-based company now needs benchmark Brent crude to rise to $60 a barrel oil this year to be able to fund investments and dividends without having to borrow, up from a previous estimate of $50 to $55. That means BP is moving in the opposite direction to Exxon Mobil Corp. and Royal Dutch Shell Plc, which said cash flow already covers spending.
The higher break-even oil price “reflects increased spending associated with the acquisitions made in December,” Barclays Plc analyst Lydia Rainforth said in a note. “Whilst we understand the rationale behind each of the acquisitions on its own, it does appear that this represents a change in priorities” that could have negative implications for shares in the near term, she said.
The company dropped as much as 3.2 percent in London and traded 2.6 percent lower at 464.1 pence at 10:20 a.m. local time, extending its decline this year to 8.9 percent. The Stoxx 600 Oil & Gas Index has fallen 4.1 percent in the period.
BP did balance its books at the end of last year, but the hunt for security of future supply means it has to push its target back for 2017 as a whole. An acquisition spree at the end of last year — taking in fields around Africa that are yet to begin production — will result in a cash shortfall this year, BP Chief Financial Officer Brian Gilvary said in an interview.
“The new entry into Mauritania, Senegal and Zohr, all of those will require some cash this year and therefore there is a slight imbalance of just over $1 billion,” Gilvary said. “Cash that’s required to invest in those for this year” pushes the company’s break-even oil price to $60, he said.
In December, BP agreed to a $2.2 billion expansion of output in Abu Dhabi and a $916 million investment in fields in Mauritania and Senegal. That was followed by a A$1.785 billion ($1.4 billion) acquisition of Woolworths Ltd.’s network of Australian gas stations. It also snapped up a 10 percent stake in Eni SpA’s giant Zohr gas field in Egypt for $375 million in November and a bigger chunk of Indonesia’s Tangguh liquefied natural gas project for $313 million in December.
BP’s oil and gas production showed the need for new projects. It averaged 2.19 million barrels of oil equivalent a day in the quarter, down 5.5 percent from a year earlier.
Cash flow from operations fell to $2.4 billion in the fourth quarter, 58 percent lower than a year earlier. Net debt continued to climb, with the leverage ratio rising to 26.8 percent at the end of 2016 from 21.6 percent a year earlier, according to the statement. BP has pledged to cap it at 30 percent.
Like several of its peers, the company also reported adjusted profit that missed analyst estimates after earnings from refining and trading oil fell. Profit adjusted for one-time items and inventory changes totaled $400 million, falling short of the $567.7 million average estimate of analysts.
A pattern has emerged across the industry that’s reinforced by BP’s results. Profits from oil and gas production are rising with higher crude prices, but are being offset by weaker-than-expected earnings from refining and trading.
BP’s adjusted downstream profit before interest and tax, which includes refining and trading, fell 28 percent in the fourth quarter to $877 million, it said in a statement. The partial shutdown of its U.S. Whiting refinery, the company’s largest, hurt sales in the period, while the expense of the turnaround drove up costs. The company also posted a “small loss” from oil trading, Gilvary said.
“Almost all of the majors have missed earnings estimates and the big theme for the quarter has been weaker refining,” said Brendan Warn, a London-based analyst at BMO Capital Markets. “Maybe people were expecting things to turn around too soon.”