BP aims to double cash flow with emphasis on high-margin oil fields

OIL giant BP will concentrate on large and highly profitable projects such as the Clair Ridge field west of Shetland this year in a move that will almost double its cash flow.

Fourth-quarter results on Tuesday will show the company has completed the first half of its “shrink to grow” strategy following the Gulf of Mexico disaster, leaving production levels at a low point. But analysts are already looking ahead to a more profitable future as the firm starts to expand again, with an emphasis on high margin fields.

The company began pumping oil from vast offshore fields in Norway and Angola at the year end.

Ian Armstrong, oil industry analyst at Brewin Dolphin, said new technology and the huge volumes available will make these far more profitable than BP’s older, “legacy” fields that will be reflected in this week’s figures.

“BP is only going to bring stuff on stream if it can get superior margins on it,” he said.

He said Angola is one of the most profitable areas in BP’s portfolio, while new “4D” 
seismic imaging which can be carried out during development and drilling caused “audible gasps” when it was demonstrated to investors recently and will revolutionise the profitability of projects such as Clair Ridge. Meanwhile, many smaller fields, including some in the North Sea, have been sold in a divestment programme that has seen chief executive Bob Dudley raise $37 billion (£23bn) to pay the legal bill for the spill which almost destroyed the company in 2010.

The firm has just one hurdle left to clear with the US Department of Justice to avoid a courtroom showdown on 25 February. Recent progress on other negotiations means analysts are now more optimistic that an agreement will be reached for BP to avoid its worst-case scenario of criminal charges and even more punitive fines.

On top of the Gulf of Mexico-related asset sale, BP negotiated an exit from its Russian joint venture TNK-BP last year. With only 21 days of production from the subsidiary included in Tuesday’s figures, Charles Stanley is forecasting net income of $3.3bn for the three months to December, down from $5bn the year before.

Analyst Tony Shepard said that may sound disappointing, but BP was “in transition”, and TNK had added around $5bn a year to the firm’s pre-tax profits.

He said: “The disposals have helped to reduce complexity and make BP more focused. Excluding divestments, underlying volume is expected to grow in 2013.”

He said underlying production could even have increased quarter-on-quarter at the end of last year as the maintenance season was winding down and the benefit from new projects began to feed through.

With projects coming on stream averaging double the cash margins of the legacy fields, he says BP’s cash flow should climb to $31bn a year by 2014, compared to $18.5bn in 2011 – despite a falling oil price.