Jul 31, 2018
Operator
Welcome to the BP presentation to the Financial Community, Webcast and Conference Call. I now hand over to Craig Marshall, Head of Investor Relations.
Craig Marshall
Welcome to BP's Second Quarter 2018 Results Presentation. I'm Craig Marshall, BP's Head of Investor Relations.
And I'm here today with our Chief Executive Bob Dudley and our Chief Financial Officer, Brian Gilvary. Before we begin, I'd like to draw your attention to our cautionary statement.
During today's 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. Now, over to Brian.
Bob Dudley
Thank you, Craig and good morning everyone. Thank you for joining us.
It’s certainly been a busy first half of the year for BP, even busier these last few days with the news that we will acquire the U.S. onshore assets from BHP.
I will talk about that transaction as part of this call, but the main focus for today is to provide you with a summary of our results for the second quarter of 2018 and an update on the financial and operational progress for the first half of the year. I’ll start with some highlights from the first half and provide some reflections on the market forces that have at play in the macro environment.
I’ll also talk about how we are shaping the business for the future and then go on to summarize the key points of the BHP deal once more. Brian will report on the detail of our second quarter numbers, financial frame and 2018 guidance and I’ll then come back to update you on our operational performance so far and provide more detail on our commitment through advancing the low carbon agenda, and then we’ll take your questions.
So to begin with some highlights from the first half of the year, we’re now six quarters into our 20-quarter plan and we continue to move ahead. Underlying profit for the second quarter remains strong at $2.8 billion and compares to $2.6 billion in the first quarter and $700 million a year ago.
And our underlying cash flow of $12.4 billion in the first half more than covered our organic capital expenditure and the full dividend. These are numbers that reflect our continued focus on disciplined execution of the strategy we laid out at the beginning of 2017 and we’re also seeing similar progress across the business segments.
In the Upstream, we reported pretax earnings of $3.5 billion unpinned by around 10% growth in underlying production compared to the same period last year. That’s an improvement on our first quarter 2018 result which itself was our best since the third quarter of 2014.
We also continue to build our portfolio in a way we believe is distinctive to BP optimizing the value of our assets in both incumbent and growth areas. Last week's announcement is a good example of our approach.
Last week's move materially high grades and repositions our U.S. Lower 48 business in line with our Upstream strategy.
In the Downstream, we reported underlying pretax earnings of $1.5 billion. The segment continues to deliver against this growth agenda, notably across fuels and refining, with continued growth into new retail markets.
And we announced a series of investments through the half year on FreeWire, StoreDot and Chargemaster. This combination of interest in fast charging technology, battery innovation and the U.K's largest electric vehicle charging network operator helped to position us effectively for the fast evolving electric vehicle market, not a threat but an opportunity to BP.
We are doing all of this while maintaining our tight organic capital expenditure range of $15 billion to $17 billion over the medium term and gearing within a range of 20% to 30%. Given our quarter-by-quarter results, and with our confidence in the outlook for group organic free cash flow, we announced last week at 2.5% increase to the quarterly dividend.
With this, the second quarter dividend is increased to 10.25 cents per ordinary share, or 61.5 cents per ADS. This is the first increase in the dividend in four years, demonstrating the confidence; the board has in our disciplined financial framework, the operational momentum across the whole business and our commitment to growing distributions to shareholders over the longer term.
Turning to the macroenvironment, the world economy continues to grow despite concerns around potential trade disputes and other market forces. Global GDP is expected to increase by around 3% in 2018 and 2019 supporting strong oil demand growth as well as increasing demand for natural gas, notably Asian demand for LNG.
Across the refining system, margins remain strong at above average levels supported by high levels of utilization and diesel demand. Looking at the oil market more closely, OECD stock levels have returned to a more normal level as shown in the chart on the left.
Oil prices have trended higher this year, supported by strong demand growth in a number of contributing supply factors which have unsettled the outlook, particularly supply disruptions from oil-producing nations, particularly Venezuela and Libya. Their questions over the timing and effects of U.S.
sanctions on Iranian crude exports and U.S. infrastructure bottlenecks, particularly in the Permian basin.
OPEC and other participating countries have agreed to increase production to counter the effects of these supply disruptions, but there is uncertainty as to whether there is sufficient spare capacity if the disruption increases significantly. These uncertainties can serve to maintain upward pressure on the low price over the near term.
Looking further out, we continue to plan for oil prices in the range of $50 to $65 per barrel. So we have been delivering the strategy we laid out to you in February last year, shaping our portfolio and creating a business that is resilient and fit for the changing world.
We continue to grow our gas and advantaged oil portfolio in the Upstream. We have a strong set of major projects out to 2021, driving growth in the near term and creating deep optionality into the next decade.
I can't remember when it is looked this good, alongside that, we are optimizing and high grading the portfolio by deepening it in our core areas and exiting assets where we can create value by divesting to others. Over the past few years you have seen us do this in the Norwegian North Sea, Gulf of Mexico, Argentina and most recently through the transaction involving our Clair U.K.
North Sea oil field. At the same time, we continue to look for things that are accreted to shape our portfolio, through inorganic investments such as the recent BHP transaction, which creates increased optimality across our existing U.S.
onshore operations, as well as growing value in a basin where we previously didn't have access. Looking at the Downstream, our market led growth strategy is making strong progress, particularly in our fuels marketing business around the world.
We’ve expanded in major growth markets such as China and Mexico, where we can offer customers a differentiated experience through our brand, high-quality products and services. We continue to progress our convenience retail offering in established markets, further supporting our goal to grow our earnings in the Downstream As I mentioned earlier, we are moving forward in the broader advanced mobility space, which is integral to our low carbon agenda.
We’ve made a number of investments so far this year in electric vehicle charging infrastructure and battery technology. These investments position us to take a compelling offer to mobility market that is increasingly looking to electrification for its solutions.
We are underpinning all of this activity where our commitment to modernize the whole group from the systems and tools we employ to the data we collect and the new technologies which can transform the way we work. Before I hand over to Brian, let me take a few minutes to discuss the key points of the transaction we announced last week.
One of the most exciting and transformational investments we have made in recent years. The Lower 48 team laid the groundwork for this over the last four years having radically transformed that business, driving significant improvements through the application of leading operational processes and technologies, and turning it into a top quartile operator.
The acquisition of these U.S. onshore assets builds on this proven track record.
It gives us access to one of the most exciting regions in our industry. The liquids rich Permian Delaware basin, as well as premium positions in the Eagle Ford and Haynesville basins.
It has high quality assets and over 4.6 billion barrels of oil equivalent of resources that repositions our existing Lower 48 business, materially high grading the portfolio. Importantly, and this is very important, this acquisition will be accommodated within our existing financial frame with our medium-term organic capital expenditure of $15 billion to $17 billion and our guidance for our balance sheet and returns on capital employed remaining unchanged.
To go together with this, we've announced the intention to divest an additional $5 billion to $6 billion of assets, predominantly from the Upstream, bringing our net investment to around $5 billion in the transaction. Proceeds from divestments are expected to fund up to $5 billion to $6 billion of further share buybacks over time.
Post integration, we expect this acquisition to be accretive to earnings and cash flow per share and by 2021, the Lower 48 is expected to be contributing an additional $1 billion to Upstream pretax cash flow. As we look to the longer term, these long-lived unconventional oil and gas assets are an important addition to the suite of growth options we have, and they provide material value creation potential into the next decade and beyond.
We will talk to you more about our plans for the business in the coming months. However, for now, let me hand over to Brian who will take you through our second quarter financial results.
Brian Gilvary
Thanks Bob. Firstly, a brief overview of the environments in the second quarter.
Brent crude has averaged $74 per barrel for the second quarter 2018 compared with $67 per barrel in the first quarter. This reflects continued strong global demand, the reduction OECD inventory levels and the supply and demand dynamics Bob mentioned earlier.
U.S. gas prices saw less volatility than the first quarter with Henry hub gas prices averaging $2.80 per million British thermal units in the second quarter compared with $3 in the first quarter.
BPs global refining market margin averaged $14.90 per barrel in the second quarter seasonally higher than the first quarter average of $11.70 per barrel and higher than a year ago. This reflects strong diesel demand, leading to lower distillate stocks.
Moving to results summary, BP’s second quarter underlying replacement cost profit increased to $2.8 billion compared to $680 million a year ago and $2.6 billion in the first quarter of this year. Compared to a year ago, the result benefits from significantly higher Upstream liquids and gas realizations, lower exploration write-offs and an increased contribution from Rosneft.
In the Downstream the benefits of stronger industry refining margins and high Canadian heavy crude discounts were partly offset by a small loss in oil supply and trading and the divestment of our interest in the SECCO joint venture. Compared to the first quarter the result reflects an increased contribution from Rosneft, higher liquids realizations and lower costs in the Upstream.
In the Downstream, the result benefitted from a stronger performance and in fuels marketing, higher industry refining margins, but lower WCS heavy crude discounts. In both the Upstream and Downstream, the results were partly offset by a higher tax rate, increased turnaround activity and a weaker overall trading contribution.
As Bob previously mentioned, the second quarter dividend payable in the third quarter of 2018 has been increased to 10.25 cents per ordinary share. Turning to cash flow and sources and uses of cash.
Excluding oil spill related outgoings, underlying operating cash flow was $12.4 billion for the first half of which $7 billion was generated in the second quarter. This included working capital release of $1.3 billion in the second quarter, partially offsetting the $1.7 billion bill we saw in the first quarter.
Organic capital expenditure was $3.5 billion in the second quarter and $7 billion for the first half of 2018. In the first half of 2018, our organic free cash flow surplus was $1.6 billion.
Turning to inorganic cash flows, in the first half of 2018, divestments under the proceeds totaled $300 million. We may post tax Gulf of Mexico payments of $2.4 billion and inorganic capital expenditure was $800 million.
We've also remained active in our share buyback program and brought back 29 million ordinary shares in the first half of 2018, at a cost of $200 million. At the end of the second quarter, net debt reduced by $700 million and gearing was down to 27.8%.
Turning to our guidance for 2018; looking to the third quarter, we expect Upstream reported productions to be broadly flat with the second quarter reflecting continued seasonal turnarounds and maintenance offset by the continued ramp up of our major projects. In the Downstream, we expect lower industry refining margins.
We also expect significantly high levels of turnaround activity in the second half of the year, particularly our Whiting refining the U.S. At the midpoint of the year, we’ve revised some of our 2018 guidance specifically, we now expect organic capital expenditure to be around $15 billion, reflecting continued capital efficiency and cost inflation, and divestment proceeds in 2018, I now expect it to be over $3 billion, with proceeds weighted toward the fourth quarter.
This does not assume any proceeds in the divestment package we announced associated with the purchase of BHP's on shore Lower 48 business. The rest of our guidance remains unchanged.
The total DD&A charge is expected to be higher than 2017, reflecting higher Upstream production volumes. Gulf of Mexico oil spill payments are expected to be just over $3 billion in 2018 with $2.4 billion already paid in the first half of the year.
Our balance sheet remains strong and we expect gearing to remain within the 20% to 30% band. In other business and corporate, the average underlying quarterly charge is expected to be around $350 million, although this may fluctuate between individual quarters.
And in the current environment, the underlying effective tax rate is expected to remain above 40%. In summary, our financial framework is robust.
Underlying earnings continue to grow underpinning the 2.5% increase to our quarterly dividend to 10.25 cents per ordinary share. Our organic capital spend is now expected to be around $15 billion in 2018 and we continue to expect 2018 organic free cash flow breakeven to be around $50 per barrel.
Beyond this, we expect fuel price breakeven to steadily reduce to around $35 to $40 per barrel by 2021 and over the same period ROACE to improve to over 10% at $55 a barrel. We expect to offset the dilution from scrip dividend issuance over time, and as seen with the dividend increase announced last week, we remain committed to growing sustainable free cash flow and distributions through our shareholders over the long term.
On that note, let me now hand back to Bob.
Bob Dudley
Thanks, Brian. Let me now update you on some key milestones for our operating segments before we take your questions.
What you see in summary here on the slide for the Upstream is how our focus on quality execution is continuing to deliver record operating performance, with operated plant reliability remaining at 96% in the second quarter. We have started up three major projects so far in 2018, Atoll in Egypt, the Taas expansion in Russia and earlier this month we started commercial deliveries from the Shah Deniz Phase 2 ahead of the schedule.
Shah Deniz 2 is our largest operated subsea development and along with the South Caucasus pipeline expansion we expect cost to come in at 20% below sanction. It is the starting point for the Southern Gas Corridor series of pipelines that will deliver natural gas from the Caspian Sea direct to European markets for the first time.
Looking ahead to growth into the next decade, we made five final investment decisions on projects in Oman, India, Angola and two in the U.K. North Sea.
This further derisks the 900,000 barrels per day of incremental production from major projects that we expect to add by 2021. We also recently announced that we are deepening our operated position in Clair in the U.K.
North Sea increasing our equity from 29% to 45%. Clair has more than 7 billion barrels of oil initially in place, and has significant value associated with future development opportunities, including the Clair Ridge project currently under development.
I like to also mention a great example of how we are moving ahead with our modernization and transformation agenda. Earlier this year, we introduced you to Apex.
It sounds like the top of a mountain. Actually, it acts like a digital twin of real world facilities and allows us to optimize production.
In 2Q, we added it to over 1000 wells in Alaska and we now have 22 operated assets globally using the tool. Last year, Apex contributed to the 0.6% growth we achieved in our base production, which gives you a sense of the impact digital can have.
In the Downstream, we are also moving ahead. In manufacturing, we continue to grow the value from refining commercial optimization with our Whiting refinery in the U.S.
processing record levels of crude for the half year. We also extended bio co-processing into more of our refineries.
And in petrochemicals, we announced two new PTA licensing agreements. One was SOCAR in Turkey, and the other was Duschan Energy in China, demonstrating the strength of our industry-leading proprietary technology and allowing us to generate reliable sources of income without the need for capital investment.
In retail, we now have our convenience partnership offering more than 1200 sites across our network. Through the strength of our brand and offer, we have also continued to grow premium fuel volumes.
And in Mexico, having entered the market just last March, we have now opened up more than 300 sites. As mentioned, we have significantly progressed our advanced mobility agenda through the acquisition of Chargemaster.
And in May, we invested in StoreDot, a leading developer of ultra-fast charging battery technology. With these deals and differentiated fuels and convenience offers, we are well-positioned to become the leading fuel provider for both conventional and electric vehicles turning now to the dual energy challenge and our role in providing the world with the energy of demands, but produced and delivered with fewer emissions.
Earlier this year, we released our Advancing the energy transition report, which lays out our commitment to advancing a low carbon future. This commitment is integral to the broader strategy of BP.
It's clear and it involves every part of the business. Our reduced, improve, create or rick [ph] framework sets out how we will achieve this across all parts of our business.
By reducing emissions from our operations, this includes targets, such as zero routine flaring in the Upstream by 2030, and the use of solar energy instead of gas to power pumps in our Lower 48 business. The “I” in the RIC framework improving our products.
In addition to our PTA, Air Products and BP fuels with active technology, we are looking at other ways to incrementally improve the products our Downstream manufacturers, such as carbon neutral lubricants. And the “C” in the framework creating low carbon businesses like light source BP, which recently completed its first project in India, marking the company's first utility solar asset to be commissioned in a country with huge potential for solar energy.
These are all practical examples of our reduced, improve, create framework and action. They include specific targets because that's how you get things done and it's an approach that draws on what we've learned over more than two decades of low carbon activity.
It's an approach we like and that we believe will deliver on the commitment we made. Now let me finish with a reminder of the BP proposition to you as shareholders.
And not only the words on the slides, but what it looks like in reality. Safe, reliable and efficient operations always come first day in and day out executing our plan with discipline.
We are delivering on our plan, our operations are running reliably and we are bringing on major projects on time and on budget, and well under budget in the case of the Shah Deniz Phase 2 project. We are a global energy company with a distinctive portfolio that's balanced regionally, onshore and offshore conventional and unconventional, and with a growing low carbon mix.
It’s packed with optimality and we’re optimizing it all the time. There is no better example of that than our new access to premium U.S.
onshore acreage in the Permian Eagle Ford and Haynesville basins in the U.S. but you’ll also see other examples this quarter like the Clair transaction with ConocoPhillips and our acquisition of Chargemaster.
And our commitment to capital discipline remains unchanged, generating even greater value for shareholders from our access right around the world including some of the best basins in the U.S. onshore.
And we are doing so, while remaining within our existing indiscipline financial frame as I set out earlier. Together, this is a proposition that we have had in place for some time.
It's consistent, its working and it's all in service through our goal of growing sustainable free cash flow and distributions, as we did last week with the increase to our dividend. Thank you very much and let me know turn it over to you for questions.
Operator
[Operator Instructions]
Craig Marshall
Okay thank you everybody for listening. We’re going to turn now to questions and answers.
Just a reminder please to limit your questions to no more than two per person so everybody gets a chance to ask. We will take the first question from Lydia Rainforth at Barclays.
Lydia?
Lydia Rainforth
Thanks guys, and good morning. Two questions if I could.
The first one is for Bob. When you’re talking about modernizing the older BP group, are there areas where you are seeing that going ahead of schedule or other areas were a bit difficult or was it evenly across the grid?
And then the second question for Brian, if I could. Just in terms of the cash flow numbers for this quarter, if I look at the cash flow levels on an underlying basis versus last year they seemed very similar despite the high role price.
And I understand the trading laws and the Gulf of Mexico maintenance, but I was just wondering if you could quantify what some of those impact for us? Thank you.
Bob Dudley
Lydia, thank you very much. This modernizing the group is extraordinary things happening all across the industry and with BP we throw around big words like Big Data, but actually the use of sensors and working through the day they are all away through exploration all the way through our reservoir engineering and optimization of wells and field developments are quite astounding and I think we are going to show some of you in September as visitors to BP.
The areas that I think are going faster than we thought and it comes from not mandating it from the top or putting these technologies out and the update and where they are being used in digital platform such as blockchain, quantum computing, cognitive computing is starting to improve efficiencies, but it's really the use of our data, sensors and the ability to visualize these things and make decisions faster is quite quite astounding. I don’t – can’t say what all the other companies are doing, but these is going faster I think than any of us thought.
And it's once a gig gets going the momentum just builds and everybody wants to use them.
Brian Gilvary
And then Lydia on terms of cash, it’s a 90-day window, so there’s a lot of moving parts, so if we sort of look at the first half cash numbers, I think that gives you a better feel, but I’ll talk about what’s happened in 2Q versus 1Q, it creates a bit of a noise, as you look quarter-to-quarter or 2Q versus 2Q last year, similar things. If you look at EBITDA on a straight 1Q, 2Q it’s flat, you’d expect it to have come up.
The difference is basically what you said it's -- it's maintenance, the maintenance programs in 2Q and the slight loss in trading, which meant that effectively trading as a weak result 2Q over 1Q. If you look at specifics for the year, half year, $12.8 billion.
If you strip out the $400 million of working capital build that we saw in the first half of the year, set against the $7 billion capital number and and about $3.9 for the full dividend including scrip, gives you some $32 billion [ph] of surplus cash in the first half of the year, which if you run it through the rules of thumb, its not far off we'd expected to be, but there's quite a lot about the moving parts that you can't see in the second quarter. And I'll just highlight three.
One is cash tax paid in 2Q is $400 million than the first quarter. There is a string of NOIs, non-operating item cash flow impacts in 2Q associated with, for example restructuring costs, CapEx, cash, sorry, cash going out from RATX in the second quarter is high than it was in the first quarter, and then the trading result we talked about.
Although trading made money in the second quarter, we had a small loss inside the oil trading result and therefore the delta of 1Q, 2Q in terms of total trading created the difference. So it's hard to try and zone in on just 90 days is being what's happening with the operating cash.
If you look at first half its not far off where you'd expect the rules of thumb for it to be.
Lydia Rainforth
Okay. Thank you.
Craig Marshall
Okay. Thanks, Lydia.
We'll turn next to Jason Gammel at Jefferies. Jason?
Jason Gammel
Hi everyone. I just wanted to come back to the BHP transaction.
And Bob, can you talk about why you decided essentially been on the full package rather than just targeting the Permian basin or the Permian basin and the Eagle Ford. I guess specifically where you're looking at Haynesville as been low cost of supply in North American gas or there any other drivers there?
And then I guess just one more follow-up, can you talk about any growth rate assumptions that you have on production when it comes to the billion dollars of free cash flow that you expect to deliver?
Bob Dudley
Jason thanks. I'm just going to throw that right over to Brian because he just answered the question just before the call.
Brian Gilvary
Yes. So just on the package of it one is it probably all on those public auctions we've seen for sales of assets given the amount of coverage on it.
There were seven packages and I think its fair to say that if you added up all the bids on those seven packages we would not been able to get anything like as an attractive deal as you saw. That said actually, this is a suite of assets that we'd look up for some time even before it came on the market.
We've talked historically about trying to find solutions for Lower 48 that will give us access through broader suite of potential options, and we talked those through with our investors historically. So we knew these assets.
When they come on the market it was clear to us that the real advantage and benefit was the total package. As there were seven packages I can tell you this because we know as a matter of fact, we have had a number inbounds already on these assets that we've just won because certainly I think there were some people out there that may bid on specific assets as part of the seven packages that certainly we would number significantly above where we were.
So our attraction was there were clear synergies in the Haynesville and Eagle Ford and it then gave us a very important foothold as Bernard described last week. If you look at the activity in Reeves County, it is a sweet spot inside the Permian and therefore enabled to get a foothold into that.
So for us it was -- where the value was actually the total package. If you look at the breakdown of the seven packages I think some of the part was I suspect above where we came in, the issue I suspect for our counterpart of BHP would have been execute ability of those seven packages.
And I think the advantage we gave them from day one was a very fast transaction that was clean, that was not incumbent with by other parties that we will be able to execute and I came back to this last week. Our M&A teams have done something close to it over 100 billion of transactions now in the last eight years in part of the offer we put on the table is that we could act clean and quickly on those assets.
Bob Dudley
And Jason I want to just add, I know for driver for this as we have a great team in a Lower 48 and you all will know that they primarily have dry gas to work on. So, being able to put their tools and techniques and expertise now to this set of assets was another driver in it and we'll high-grade and shift around that portfolio somewhat.
Brian Gilvary
And then Jason, in terms of sort of production I think Bernard laid out last week that actually this will enhance what is production looks like over the next five years, but I will more guidance on that at the end of the year when we do the Upstream Investor Day.
Jason Gammel
Very good. Thanks for that.
And congratulations on the transaction.
Craig Marshall
Thanks Jason. Okay, we'll turn to Theepan Jothilingam of Exane BNP next.
Theepan Jothilingam
Yes. Hi, good morning, gentlemen.
Two questions please. First, just come back to cash and think about the evolution in H2.
Can you give a little bit more details in terms of the impact on Whiting versus sort of the volume momentum? The second question could you just please give us an update in terms of Macondo where we sit with the BELs on the process of closing the facilities and payments?
Brian Gilvary
Yes. I'll come to both of those, Theepan.
So, yes, we've got high turnaround activity coming through. Actually we've also go to Cherry points as well, but we don't only quantify what the price effects would be.
In terms of Whiting overall you saw the light-heavy spread came in the second quarter for the tune of about $5, and that impact to some of the results on cash and what we saw coming through. But we do have a higher turnaround coming through in terms of second half of the year around Whiting, primarily Whiting.
It's due to begin around September and it last for probably seven weeks. So I think we wouldn't normally give you specific guidance in what that would mean, but I think you can sort of work out, if we look at production runs for Whiting what the seven-week impact will have in terms of cash flows.
In terms of Macondo, we have paid out the bulk of the cash payments. For this year we said that they'll be slightly over $3 billion.
We paid out 2.4 -- the 2.4 in the first half of the year was primarily the two big major settlements we did in October 2012. The final payments of that went down in the first quarter, $1.2 billion.
The first payments went out around the 2015 July settlements in the first and second quarter and that bring to sort of final cash payments going out around the Plaintiffs Steering Committee Settlements. You saw we took a slightly high provision around BEL this quarter which is cleaning out the sort of tale of those under the $190 million after tax.
We're now down to basically about 40 claims in the system that needs to be resolved, it will be resolve through 3Q and 4Q. So in terms of cash payments on Macondo, the bulk over 80% or up to 80% have gone out already than what we anticipated for this year.
And now we're just finally in the litigation tail. You also saw this quarter we cleaned out some litigation outside of BEL, we've taken care of.
And now effectively, the chose for Eric Nitcher, our General Counsel is whether we look to try and settle things before they get to the Fifth Circuit on appeal, which would take a chunk through the second quarter or we let the litigation process for now where he's had a relatively successful so far in terms of the case he has taken forward, but we're now into sort of I call litigation tail and therefore they'll be some movements, but it will be de minimis around quarters.
Theepan Jothilingam
Thank you.
Craig Marshall
Okay. Thanks Theepan.
We'll go to Michele Della Vigna of Goldman Sachs. Michele?
Michele Della Vigna
Thank you. Two questions from my side.
First, I was wondering if you could update us on the progress toward the FID at Tortue and then the next wave of FIDs in your portfolio? And then secondly, if you could have an update on the startups for the rest of the year in particular Clair Ridge and what production you expect for the full year?
Thank you.
Bob Dudley
So, Michele, the first one on Tortue, the Phase I, we've just been meeting with Mauritania and Senegal and the governments on that. We're heading towards an FID in the fourth quarter this year.
Your second question was on Clair Ridge – from Clair Ridge, we expect to startup before the end of the year in 4Q and we're about 97% complete on the on the Clair Ridge project. I won't give you a figure yet for the year I've got it, but I think it's probably not the right thing for me to do given our partners in there.
Michele Della Vigna
Thank you.
Craig Marshall
Okay. Michele thanks.
We'll turn next to Oswald Clint at Bernstein.
Oswald Clint
Good morning. Thank you.
Just going back to M&A and obviously BHP helps solve the kind of U.S. liquids under exposure, but Bob you also mention LNG demanding strong.
And I guess you are little bit underexposed relative to your larger peers in this particular segments. So I'm just curious is there appetite or do you feel the need at some point in the future to kind of beef up just in an attempt of LNG exposure?
And the second question perhaps in the quarter or sorry in the first half year so far rest of the world liquids looks like relatively steep decline so far this year, I'm just curious, is that Angola and is that decline and kind of coming in the line with your plan, please? Thank you.
Bob Dudley
Oswald thanks. I think some people forget how much LNG we do have with Atlantic LNG out of Trinidad, part of those four trains there are involving in Northwest shelf.
We've got the two trains in Tango and the third one coming along well to startup, so I think those are -- it's a fair number. We've invested in offtake agreements.
We've got some big offtake agreements in Mozambique with ENI and some big ones off, the Gulf of Mexico, so we're certainly trading a lot of LNG. They are big expensive capital-intensive projects for example we also have some in Angola as well.
So, I'm not sure we feel light in LNG. There's always a project in Alaska that's been talked about for years.
We and Exxon, and Conoco are involved in that and we'll see about that, but it's not a burning desire in the portfolio.
Brian Gilvary
And then in terms of production numbers, Oswald, what you'll see that underlying production is up 11.7%. What you'll probably see in terms of the liquids, the rest of the world liquids, is turnarounds and seasonal impacts that come through in this quarter.
And in the reported numbers, remember you also have the expiry of the ADMA concession that came off the numbers which is a round about from memory about 66,000, 70,000 barrels a day, so that would have probably explain the delta that along with turnaround?
Oswald Clint
Okay. Thank you.
Craig Marshall
Thanks, Oswald. Okay.
We'll turn to Rob West at Redburn next please.
Rob West
Thank you for taking. Couple of it from me.
One is a reflection on the shale deal from last week and the way you're divesting assets to some of the cost of that deal. My question is that partly motivated by looking through the portfolio and seeing assets where you can unlock value in a specifically not being recognized by the market and that swap it out first in asset like Permian which the market is going to much more prone to give full credit to.
I mean, if you could talk about any specific areas where you feel like that hidden value might fit, that would be interesting? The second is specific one, just about the North Sea and particularly Clair Ridge where you deepened your stake.
Is it true that there are some tests of the fractured basement below Clair, scheduled for this year? And is that in any way part of your motivation to deepen there?
Thank you.
Brian Gilvary
So on the first part, Rob, we wouldn't normally talk about specific transactions, although actually the examples you just gave in terms of swaps is actually [Indiscernible] Clair swap is a good example of where we're looking to deepen into things, value versus volume, deepen things where we know we can have additional value. So you're seeing more activity in the swap space.
I think you'll see that across all the majors actually over the last four or five years as we look to try and consolidate positions. In terms of specific suite of packages associated with BPHP, this is all about how we finance the deal and the high grading of our portfolio.
So it's really about focusing where the cash will go in terms of value creation in that new portfolio and how we're going to fund it through tail asset disposals, but we wouldn't normally talk about specific assets – we don't normally go to sort of public auction processes. We will transact as I said before, the other team are pretty hot in terms of what they've done over last eight years.
We [Indiscernible] you'll see these, the announcements around those assets as we start to do that and then you get a flavor for the sort of assets that we're talking about. And then on North Sea in terms of Clair, we wouldn't talk about those specifics of that, I would think that would be a good question for the Upstream Investor Day come December.
Craig Marshall
But I'll just footnote. That point you raise whether that's correct or not – is not in our valuations when we do that swap.
Rob West
All right. Thank you.
Craig Marshall
Hey, Rob, thanks. We'll go next to Christyan Malek at JPMorgan.
Christyan Malek
Hi. Good morning, gentlemen.
Thanks for my questions. Firstly, just two from me.
First, when you excel the working capital and cash flows of 5.7 billion, both should be in this stronger on an underlying basis with higher oil. It looks at it as being some unexpected leakage, but you sort of explain, what are the areas that you think you can improve on in the second half?
And if I to say, the higher oil prices coming with more one-offs even when you think about based on a six months view instead of quarter swap? The second question Bob, I just want to understand that executive management imposed portfolio strategy from here.
Will you always keep in mind, as an open-minded terms of building versus buying or following the BHP deals? Is it fair to say BP's done solving for its long-term portfolio?
And I guess in that context should we think about excess funds now going directly to shareholder returns?
Bob Dudley
So in terms of on the cash flow on the first question, look, it’s a 90-day window, so its pretty hard to predict what happen as oil prices go up, you get all sort of working capital movements. I think we'll come back to the first half numbers, Christyan, I think that it can gives you better flavor what's actually happening ex the one-offs I talked about that have come through in the second quarter versus the first quarter and it will be driven by – I mean, I think EBITDA is probably a safer place to go and look in terms of trying to get to a trend to what's actually going on the underlying operating cash flows ex other things moving across the sort of seven, seven different business models, so we have a lot of moving parts in each of them and it's pretty hard to capture 90-day window to say I can take this as a firm tend from the previous quarter.
I think full quarter rolling average is a pretty good place to go, but I'll point you towards EBITDA has been the safest place in terms of actually what's happening in terms of the underlying cash flows. And then you'll get inter quarter moves like you did here with the tax restructuring costs and we had the lower trading results in 2Q over 1Q.
Brian Gilvary
And just to add about portfolio and board philosophy and executive philosophy here, I think we've been cautious to work within this narrow fairway that we've had really for many many years after of the Gulf of Mexico incident. We have done a series of bolt-on acquisitions through beginning in late 2016 and in the 2017.
This is the first large transaction we've done. We've done all of these within the guidelines and the boundaries of our thinking that they have to be accretive and they have to give us the ability to high-grade the portfolio.
So rather than shutting down any activity I'd be open-minded about it. It's not our plan to begin to continue with series of acquisitions, but if they fit this financial framework about being accretive, allow us to grow, allows to generate greater free cash flow to stay with that philosophy of increasing distributions to shareholders we'll continue to be open for those things.
Christyan Malek
So gearing and those – its result to gearing, I mean, in that case we should never think about gearing coming down as a hard target towards the amount [ph]?
Bob Dudley
Sorry, I think the more important measure is the amount of funds that we're generating over extended debt, that's the measure that really matters in terms, because ultimately that drives credit rating. So we want to keep our credit rating in the sort of band that where we are.
Gearing is just a proxy, I think frankly 30% gearing -- 35 gearing is not an issue. We keep 30% gearing as a way to create more discipline within the financial frame and that's why it's started in state now for the best part of 30 years.
We took it down to 10% to 20% during Macondo because we have a huge potential liabilities coming through from that. So, I don't think it necessarily means that will stay up anywhere near 30%.
It's actually the trend this year will be coming down. It's disguised somewhat by the $2.4 billion of Macondo payments that went down in the first half of this year.
In fact it disguised by something close to $16 billion worth of Macondo cash payments that have gone out over the last three years have include the first half of this year and the previous two years, if you back those out on that that will be in a very different positions. So I don't think you should imply anything from that rather then the fact that right now gearing and net debt is trending down especially of these higher oil prices.
Christyan Malek
Great. Thank you.
Craig Marshall
Okay. Thanks Christyan.
We'll move next to Irene Himona at Société Générale.
Irene Himona
Thank you, Craig. Good morning.
Two questions please. The first one for Brian on lubricants and lubes is about 20% of your Downstream earnings.
Its also 20% of your targeted 3 billion Downstream earnings improvement by 2021, yet Q2, in Q2 there is all this down over 8% year-on-year. It's down sequentially.
It's gone either no where or downwards for the past five or six quarters. And I wonder if you can share with us what's going on and what may change this trend that we've seen.
And secondly, a question from Bob, Bob you always made it clear that the focus is on volume for cash flow and that volume growth is the result of your strategic delivery. Is it possible to share with us what you think the BHP deal which is a highly strategic transformational deal for BP, what that deal may do to your 5% volume growth that you are guiding throughout to 2021, please?
Thank you.
Bob Dudley
So, first just on lubricants, Irene, I think this is definitely a business as fast-moving consumer goods, it's one that you have to look at over a run of years and what you will probably know straightaway is that in a market where oil prices are growing quite so rapidly at the rate at which they are that clearly impacts the base oil price and it takes time to move those prices into the marketplace. So I wouldn't worry that there is a negative trend has been developed, but there's no question they're going through these weaker quarters as they move their prices on to the street, but you can't immediately, its not like with retail fuels with lubricants because the nature of the product itself, it takes time and therefore what they’re dealing with a high base oil price that they're coming to their base cost.
You can't simply just immediately move that price onto the street. So you will see a lag, it's a much longer lag than you would see in terms of fuels.
What I would say though in terms of lubricants is actually they're continuing to grow their premium products which is you'll know from the Downstream Investor Day, there were two important parts of the lubes strategy underpinned by technology and their people which are probably their biggest assets, truly their biggest assets for lubricants division. But growing their premium products and growing in the non-OECD fast-growing markets and they are in both of those cases if I actually reviewed it last week they are both continue to progress much strategic agenda.
So I think you have to just look through the environmental impacts of the high base oil prices that come with the high oil price impacting their business over a short to medium-term ultimately they'll come back through that as prices now got back into more stable peace and some those prices get move on to the street.
Brian Gilvary
And Irene on your question about the BHP transaction, of course it will bring in, on the anticipated closure at the end of October, 190,000 barrels of oil equivalent. I have no reason to think that that we won't get those assets up to 320 -- 350,000 barrels a day.
Going forward, it'll certainly be more liquids, it will be more valuable, but in terms of putting the percentages out there it really does depend on what divestments we might make for the overall group. Our projections though is from these assets it will increase the Upstream free cash flow by over $1 billion by 2021, which is why we up the targets coming out of the Upstream by a 1 billion.
And I think that's not all from the Lower 48, but primarily from these new assets. So couldn't put a number on in terms of percentages like you say its value over volume and free cash flow is the objective.
We'll just have to see what assets we might decide to divest and put a number on it.
Irene Himona
Thanks so much. Thank you.
Craig Marshall
Okay. Thank you, Irene.
We'll turn next to John Rigby of UBS. John?
John Rigby
Hi, guys. Two questions, the first one, I guess Brian will know that I was going to ask this question.
So I want to ask about trading. In the quarter how would you characterize what happened?
Was it a function of the market or your positioning vis-à-vis the market? And if it’s a function of the market are you able to sort of characterize the kind of conditions in the market that might give rise to either weak or strong opportunities.
We were trading business just over prospectively we can judge and understand pathway where you are likely to have a good or bad quarter. Is it just too difficult to make that judgment?
The second question just is on going back to the announcements on the dividends increase on Friday. Are you able to talk to how you think about where you want to place that dividend?
You reference $50 to $65 is your sort of expectations for the operating conditions, the best case. Is your dividend effectively came to the $50 level in terms of where you want to be able to fund this and visibility you have on it?
Thanks.
Brian Gilvary
So just coming to the first question on trading, look, John, you know we can't give you any more detail than what's already out there. What I would say specifically – first of all, some facts, first half of the year all trading made money, so they are in profit for the first half of the year and trading overall was in profit for the first half of the year.
And in the second quarter our total trading was in profit. So it’s the oil trading part of the total piece.
What's specifically happen through 2Q and I don't think we were only company to have this issue was that there were some specific positions around some particularly difficult market calls and we got the call wrong, it’s a simple as that. Now therefore can we predict that?
Absolutely not. What I can say that as you'll know it, if you look at our results ever run of five years or 10 years, we will have the old quarter, this to be the third one in the last five years where we had a small loss.
Its asymmetric risk because in the way in which build optionality into that business and the base business that we have. That means that there maybe from time to time a quarter where you have a small loss equally you'll know just from what we've said historically, we can have quarters where it's an average plain quarter or it's a strong quarter.
So the risk – the way in which the risk is structured in that business is there can be a quarter where you have a small loss equally the opposite is true that there'll be quarters where you have very strong quarters significantly above the average historical plan. So, I don't think there's anything particularly in this quarter.
It was around one specific position in one book where they made the wrong market call and actually they did very good job of exiting that position which they have exited, but we can't give any more detail than that. I don't think you should take that as an indicator for future.
I realized its difficult and frustrating for to predict future results, but I think this sort of frame would give me before round of sort of five components that we think about and had slight loss, below average, average, above average and strong with sort of best characterizations we can give you for that business.
Bob Dudley
And John as we think about the dividend the way the board looks at it we've laid out the future, we continue to plan the company really precisely I would say rather than a range of 50 to 65, the working assumption – starting the dividend is based on $55 real, started out in 2017, so that will be the linchpin of our dividend planning.
Craig Marshall
Okay. Thanks, John.
We'll turn next to Martijn Rats of Morgan Stanley. Martijn?
Martijn Rats
Yes. Hello.
Good morning. I wanted to ask you two things.
First of all about the refining margins, we're actually off to a good start for this quarter. So I wanted to ask about your comments, you expect lower margin to third quarter.
If that just a mix effect from some complex refineries like Whiting going to turnaround or is there is sort of an underlying – is there underlying market core in that comment? And then secondly perhaps a bit too mechanical but just want to understand this.
And on the $5 billion to $6 billion of disposals that you are now mentioning, is that basically the number for 2019 or does that come on top of some underlying sort of rate of disposals of another sort of couple of billion dollars? Thank you.
Bob Dudley
Yes. So, Martijn, you're absolutely right, we've had a strong start for the quarter I think it's driven by distillate right now.
We're seeing strong distillate draws that's led to higher cracks on the distillate side and that's what we're seeing. Our view is simply seasonally, its not specific to BP in terms of refining margins that you'll need to take the Whiting turnaround into effect separately to this, but generally as we get towards the end of the third quarter we expect to see a bit more softness in the refining margins, but there is no question that today we're seeing a degree of strength driven by that.
But as we come out of the driving season, we'd expect it to rebalance just based on seasonally what we would anticipate in this point in cycle. The five to six is absolutely not a target for next year.
We've signaled now that we expect disposal proceeds this year to be over $3 billion which we do based on line of sight of what we've seen and what's in the pipeline. That doesn't include any of the five to six.
The five to six is linked to the deal, once we get the assets on board at the end of October which is the current schedule close date that we have agreed with BHP. We already started to create data rooms on the five to six and we'll announce those transactions over time.
We are way too much experience in this space of the M&A space. We think it will be a pretty strong market that we'll be going into but we'll see as we bring these assets to the market, but it's absolutely not a target for next year, but it is a target in terms of over the next few years as we integrate to be able to expect to get those $5 million to $6 million away.
We'll give you more specific guidance on that as we get towards the end of this year in terms of what that may look like for 2019 with full year guidance at the end of the year.
Martijn Rats
Okay. Thank you.
Craig Marshall
Okay. Thanks Martijn.
We'll go next to Chris Kuplent of Bank of America. Chris?
Chris Kuplent
Thank you very much for taking my questions. I'm going to continue with this theme, Brian I'm afraid on asset disposals.
You've done less than 0.3 or around 300 million this first half, still looking for 3 billion and in your quarterly report you mentioned to expect the contribution from the Conoco asset swap, where as I've read somewhere else that was meant to cash neutral. So perhaps you can shade a little light on or reconcile those two statements?
And then another question for you, Brian, on buybacks versus scrip, I've noticed that during the first half you've bought back less than half the amount you've issued in scrip equity. And I wonder whether we should expect that ratio to not just be one in the second half but perhaps the higher than that to make up for the first half running slightly below?
Thank you.
Brian Gilvary
So the first half I think is straightforward, we've said there'll would be over time and therefore the $2.4 billion of Macondo payments out in the first half of the year means that scrip buyback will accelerate into the second half of the year. So I think, I mean, Chris, we'll be very clear about that from day one that don't set over time recognizing, be asymmetry to first part of your question which is the best proceeds have always been back-end loaded for this year, we made that clear on the start the year and we now expecting to have a $3 billion.
With the inorganic frame we have, in terms of the assets swap on ConocoPhillips, the accounting treatment will have a disposal proceeds. There is no way to avoid that.
So you'll see disposal proceeds coming through for the input of that, but you also see cash going out for the other side of the swap which was the acquisition, so that's just accounting. But in terms of what we're looking for in terms of disposals to give Macondo liabilities something close around $3 billion is what we're looking for this year and that is again -- this is not a specific 12 month time window, Chris, it's over time.
So there is again, you'd have seen last year disposal proceeds running low at the Macondo payments as they were in the year before, but they'll be a catchup going forward on the $2 billion to $3 billion. Macondo payments next year will be close to $2 billion.
We'll continue without $2 billion to $3 billion churn of the tail portfolio over and above the five to six which is quite separate. But we've been very clear this is over time and it takes into account the asymmetry of disposal proceeds in Macondo.
Chris Kuplent
Thank you.
Craig Marshall
Okay. Thanks Chris.
We'll turn next to Lucas Herrmann at Deutsche Bank. Lucas?
Lucas Herrmann
Great. Thanks very much.
Good morning. A couple one detail, one fundamental.
Bob, can I just go back to John's question on dividend and ask why is – why does the Board decide that 2.5% was the right number, so just thinking around the scale of the increase of this stage. And then just in the context of or detail around, turnaround this quarter can you give us any indication as to whether that high or low margin assets, I'm just looking at Q2, the downtime is was Mad Dog and Mars which typically would have very healthy cash margins?
Thank you.
Bob Dudley
Lucas, we haven't had a dividend increase in 15 quarters, so I would say this was a conscious decision to signal the confidence in where we are, where the financial framework is. It wasn't a great science.
It could've been 2%, it could have been 3%, but this was the number that the board talked about and said it was in the right signal and get us moving on increasing distributions again. I think that's fair, Brian, and do you want add anything on that?
Brian Gilvary
Yes, the only thing to add is it’s a progressive dividends, its not a percentage of earnings, so we held that dividend when our earnings per share was down at $0.06 against the $0.10 dividend and now that our earnings have come back above $0.10 per share which they have been for now three quarters in a row. The board, it was an important signal for them to signal increase, so that mean 2.5% it's sort of in line with we've done before on the progressive dividends, but there's no more science to it than that.
Lucas Herrmann
Okay. And on the turnarounds as Brian mentioned, Whiting, the Whiting turnaround which is significant turnaround, that will be in third quarter that certainly not low margin, but…
Brian Gilvary
So I was thinking more Upstream…
Craig Marshall
Lucas, so the turnarounds as you pointed out there was a heavy burden in the Gulf of Mexico with some of those fields. I think as you look forward into the third quarter there's going to some in the North Sea and elsewhere, so there'll be similar characteristics, but obviously in the second quarter you're right some of the highest margin barrels we have as in that portfolio.
Lucas Herrmann
That's great. Craig thanks very much.
Craig Marshall
Okay, Lucas, thanks. We'll turn next to Thomas Adolff of Credit Suisse, Thomas?
Thomas Adolff
Good morning. Two questions from me as well please.
Firstly, just on the resource base you do have a fairly big one which is I think 50 years worth, so I guess it is about high grading when you do something inorganically. So I wonder should you buy discovered resources such as those potentially in Brazil namely the transfer of rights by the end of the year or early next year.
Would that coincide with the new disposal plan? Is that the right way to think about it?
And secondly, just in terms of concentration risk and the top five countries in terms of capital employed for you include the U.S., Azerbaijan, Russia, Egypt and Angola, the U.S. is obviously now a bit bigger with the BHP deal.
And in the past you said that typically for key region or a country production should be in a range of 200 to 250 kbd equally you also said that and it could be more if returns are attractive. Now, if we look at the U.S.
Lower 48, it could be double that 250 kbd number after the BHP deal, so geographically from a concentration risk perspective, I guess you are fine with that, but strategically I wondered how big do you want your shale to be if there is such a thing as a number. For example, one of your peers argues that shale should be similar in size to Deepwater because of x, y and z and I wondered if there's anything interesting you can say on that?
Thank you.
Brian Gilvary
Okay, well thank you. First, anything we’ll look at, for example, in the transfer of rights in Brazil, we’ll look at that not sure the timing and the pace of that in the Brazilian political framework is clear right now, but we would accommodate any options that we would do within the overall financial framework.
So that would include everything we’ve talked about before divestments you want to keep the entire financial framework intact. On geographic distributions, I mean we have said it’s about value, not volume.
We’ve got a spread of value around the world. We don't have really artificial constraints on any one area.
I would see with BP now in the United States, we have offshore in the Gulf of Mexico more than 300,000 barrels a day. The shales have the potential to be over 300,000 barrels a day.
We have our activities in Alaska, but again, we’ll look at all of those around value over volume, rather than being driven by a sort of a geopolitical risk framework.
Thomas Adolff
Thank you
Brian Gilvary
Thank you.
Craig Marshall
Thanks Thomas. Yes, over to Colin Smith at Panmure Gordon.
Colin?
Colin Smith
Yes, thanks for taking my question. I just like to return to the question of the dividend increase and illuminating the scrip.
Obviously you said you’d eliminate the script overtime, but do you think it’s a bit dissonant to actually cut the scrip elimination in 2Q at the same time as you are raising the dividend, and I wonder if you could also comment on that relation what the board thinks as sort of sensible payout ratio, a ratio bandwidth might look like given that on the quarter you are still on a 72% payout ratio?
Bob Dudley
So statistically, we have not cut the script through the second course. We were very clear in October of last year when we said we’d eliminate the scrip we did it through the fourth quarter, we’ve done it through the first quarter, fully eliminated but now in the second quarter to eliminate the first quarter scrip we’ve about as Chris pointed out half way through, that will get eliminated through the third quarter.
So we’re talking about a time window of two to three months and only if this is disingenuous, and it reflects the fact that within the financial frame we have, we had $2.4 billion of payments going out to Macondo through the first half of the year. So I think it’s really important signal to shareholder segments will offset scrip, and we will do that over a rolling 12-month period.
So you shouldn't assume that we are going to suspend the scrip purchase. We have been buying back shares through the second quarter.
We were buying back shares through this week, now we are back into out of the closed period. But within the constraints that we have, in terms of how much we can deal with and the constraints around the Macondo payments and the asymmetry of that, there’s actually no intent to stop the scrip buyback program, but we did say -- we were very clear from day one there would be overtime.
So I don’t think there’s any confusion around that at all.
Colin Smith
Right, but the payments side from Macondo went down in the second quarter and the scrip elimination went down as well.
Brian Gilvary
No, no sorry, no there was still $1 billion or so, $700 million of cash payments went out in the second quarter. The two things are not linked, it’s a function of many things around the balance sheet and how we are reading the balance sheet, but it’s not a desire.
We said it would be overtime. It is overtime.
We will have offset the 2Q DV that was issued in the second quarter by the time we get till the end of 3Q. So I don’t think there's any issue with pace here, we are all buying back shares.
Craig Marshall
Okay, thanks Colin. I will turn to the last question from Jason Kenny of Santander.
Jason?
Jason Kenny
Hi, there thanks very much. So I’ve got a question on the break even profile.
I think you’re talking around $55 this year and that kind of fits with the dividend which is set at 55 and by 2021 you’re looking for a lower breakeven profile. What do you think the impact of current $70; $75 oil will have on your ability to lower the breakeven over the next two to three years?
And I suppose, implicitly there, what are the chances you're seeing in your view a $50 oil price in 2021 versus the $75 oil price in 2021. I know it’s an impossible question, but I just want to get a feeling for how inflation effects could be a restricting the ability to lower the breakeven over the next couple of years?
Brian Gilvary
Suggest that maybe just the plan we laid out probably last year was at $55 about real. Effectively, we’ve laid out a growth profile after 2021 that will see something around I mean you can think sort of ranges on this, but something around $7 billion of surplus free cash, over and above an $8 billion dividend and that's what drives you down to $35 to $40 a barrel breakeven.
As we distribute between now and then, obviously, that changes what that profile looks like as you are not starting to distribute that cash to shareholders which is what that dividend increase last week and what was confirmed this week in the results is effectively doing. So at $55 a barrel we’ll look to still manage a progressive dividend.
The payout ratio, I didn’t actually answer the previous question around payout ratio. Typically if you look over the period of 10 to 15 years, our payout ratio is around 25% to 35%.
We’ve just come through a period where the oil price was down as low as $28 a barrel. So it’s not really reflective of what we’ve come through and then whole point of the progressive dividend is for our shareholders we will hold that dividend for you as the oil price drops as it did, and as things get back into equilibrium we’ll rebalance the books.
And we now believe, we can rebalance those books all the way down to $35 to $40 a barrel. If you assume $55 a barrel real low prices is.
There is no one or I don’t think there’s anybody around the table here will try and predict the oil prices for 2021. It will be a function of supply and demand.
Right now, supply and demand is imbalanced. I think Bob laid that out in his comments this morning.
We are seeing strong demand, dampened a little bit by the overproduction that we see coming out of Lower 48. And we’re now back into the five year averages, you’re going to see a lot more movement around the oil price plus or minus $5 based on all the issues that Bob raised this morning in terms of short term disruptions or more production coming on.
It's impossible to predict what we think it’s going to be in 2021, but I think the number that Bob used historically at 50 to 65 for the sort of medium long term is not a bad assumption, in terms of what we’d assume for planning purposes in terms of planning our company. What the actual oil price out turn will be, a function of what supply and demand looks like in 2021.
I mean, it would appear demand has continued to grow at 1.6, 1.7 million barrels a day and that certainly creates a degree of support around this levels where we are today.
Jason Kenny
Okay, thanks.
Craig Marshall
Okay, thank you Jason. And that’s I think the end of the questions that we have.
I’m going to hand over to Bob for a few closing remarks. Thanks.
Bob Dudley
First, a big thank you. As always, very good questions from all of you.
Thank you very much. Hope you've heard from us, commitment to a discipline financial framework.
We got many moving parts going on right now, but we actually feel pretty good that we’re able to move through these and meet our commitments. This is the sixth strong quarter we've had.
We look at it inside the company as the sixth quarter out of 20 that we laid out before, as a demonstration to commitments to increasing distributions to the shareholders you’ve seen a dividend increase this quarter with a lot of time and thought in it. It’s the first time in fifteen quarters, and we've outlined for you a big transaction for us and BHP, offset by, and we think if it is not a giant transaction, is in fact a really good transaction that we will use the high-grade BP's portfolio.
We’re hitting the road today and tomorrow all the way through the end of the week. We’ll see many of you on road shows; we’ll have three teams out in the U.K.
and across the U.S., so hopefully we'll cross paths here in the next few days, and again thank you very much for your interest in BP.