Aug 3, 2021
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
Good morning, everyone, and welcome to BP's Second Quarter 2021 Results Presentation. I'm here today with Bernard Looney, Chief Executive Officer; and Murray Auchincloss, Chief Financial Officer.
Before we begin today, let me 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.
I'll now hand over to Bernard.
Bernard Looney
Thanks, Craig. Good morning, everyone, and welcome to our second quarter results for 2021.
Thanks for joining us. We are reporting what I hope you'll agree is another strong set of financial results.
For the quarter, underlying replacement cost profit was $2.8 billion, operating cash flow was $5.4 billion, net debt fell for the fifth consecutive quarter to $32.7 billion and we have achieved our target of $2.5 billion of cash cost reductions around six months early. In addition, consistent with our disciplined financial frame, we are increasing our resilient dividend for the second quarter 2021 by 4% per ordinary share, while maintaining our cash balance point of around $40 a barrel.
And at an oil price of around $60 per barrel Brent, we see capacity for around this level of annual increase through 2025. We are also commencing our share buyback from first half surplus cash flow with a $1.4 billion program, which we expect to complete by the time of our third quarter results.
And at around $60 per barrel Brent, we expect to be able to deliver a buyback of around $1 billion per quarter. Importantly, these commitments are underpinned by: one, the underlying performance of our business; two, an improving environment; and three, our confidence in the balance sheet.
Looking ahead to 2025, we see a significant opportunity to continue growing underlying cash flow as we take costs out of the business, improve operating efficiency and reliability, deliver the next wave of high-margin major projects and grow our convenience and mobility business, all while transforming BP for the longer-term by taking disciplined investment decisions in support of our transition to an integrated energy company. This is, in essence, what we mean by performing while transforming.
And I'll come back to talk about our strategic delivery later. But for now, let me hand over to Murray to take you through our results and financial frame in more detail.
Murray?
Murray Auchincloss
Thanks, Bernard, and hello, everyone. I hope you and your families are safe and healthy.
As usual, let's begin with the macro environment, where sentiment has improved. Oil prices continue to increase, with Brent averaging $69 in the second quarter, a 13% rise.
This reflects the improved demand outlook as COVID-19 restrictions were gradually lifted, while OPEC+ has continued to show discipline and progressively increasing output. Looking to the second half of this year, we expect oil prices to remain firm as inventory levels decline to historic levels, driven by ongoing increases in demand and continued active supply management by OPEC+.
Turning to gas prices. During the quarter, Henry Hub averaged $2.90, down from $3.50 in the first quarter as prices normalized after storm Yuri.
International prices strengthened during the quarter, with JKM LNG price averaging around $10, driven by very strong Chinese demand growth with high European gas prices due to supply issues. We expect global gas markets to remain tight in the second half of 2021 with additional LNG supply outages or further delays to North Stream-2 presenting potential price upside.
Turning to refining. Industry margins increased strongly during the quarter, with BP's RMM averaging $13.70, the highest level since the third quarter of 2019.
However, the recovery has been uneven across products and regions, with much of the increase in BP's RMM driven by higher U.S. markers.
This reflects a strong rebound in U.S. gasoline demand and the near doubling of the cost of U.S.
renewable fuels credit since the start of the year. However, as you know, the credits do not impact realized refining margins.
Northwest Europe margins increased more modestly due to weaker demand growth, notably for middle distillates. Looking to the third quarter, industry refining margins are expected to be broadly flat compared to the second quarter, with recovering demand offset by growth in refining capacity.
Turning to results. In line with our annual cycle, we have reviewed our price and margin assumptions used for both investment appraisal and value and use impairment testing.
Effective this quarter, we have updated our oil price assumptions. Other price assumptions are unchanged from those disclosed in our 2020 annual report.
Our Brent oil price assumption to 2030 has been increased to $60 per barrel in 2020 real terms. This is due to capital discipline limiting supply across many basins.
Over the longer-term, our Brent oil price assumption has been decreased, reaching $45 per barrel in 2020 real terms by 2050, as we expect an acceleration of the pace of transition to a lower carbon economy. In aggregate, our view of the average price over the 2021 to 2050 period is unchanged at around $55 per barrel in 2020 real terms.
As a result of this revision, our second quarter reported profit included a pretax impairment reversal of $3 billion. Moving then to underlying results.
In the second quarter, we reported an underlying replacement cost profit of $2.8 billion compared to an underlying replacement cost profit of $2.6 billion in the first quarter of 2021. In gas and low-carbon energy, the second quarter result reflects higher realizations, offset by a strong gas marketing and trading result following the exceptional performance in the first quarter.
It also reflects a higher DD&A charge as a result of major project ramp-up this quarter. In oil production and operations, the second quarter result reflects higher liquids realizations.
And in customers and products, the second quarter result benefits from momentum in the customer business with higher retail and aviation volumes and strong convenience performance. In products, the result reflects a loss in refining, slightly less than the first quarter.
This was driven by a higher level of turnaround and maintenance activity and continued low realized margins due to excess supply. The contribution from oil trading was lower than in the first quarter.
As announced, the second quarter dividend, payable in the third quarter, has been increased by 4% to $5.46 per ordinary share. Turning to cash flow and the balance sheet.
Commencing this quarter, we have enhanced our working capital reconciliation to include fair value accounting effects. While this item was already disclosed, we believe that its inclusion and the reconciliation will better help users understand our cash flow delivery from underlying replacement cost earnings.
Operating cash flow was $5.4 billion in the second quarter. This included $1.2 billion of Gulf of Mexico oil spill payments within a working capital build of $500 million.
Our cash flow delivery continues to benefit from the progress being made on cash cost reduction. As Bernard said, we have achieved our target of delivering $2.5 billion of cash cost savings on a run rate basis relative to 2019, around six months earlier than originally anticipated.
Capital expenditure was $2.5 billion in the second quarter. And as guided, during the quarter, we repurchased $500 million of shares, offsetting the expected 2021 dilution from vesting of employee share awards.
During the second quarter, surplus cash flow was $700 million. As a result, we generated $2.4 billion of surplus cash flow in the first half of 2021 after reaching our net debt target of $35 billion.
Reflecting the strong cash flow delivery, net debt fell for the fifth consecutive quarter to reach $32.7 billion at the end of the second quarter. In addition to debt reduction, during the first half, we took further steps to create a more resilient balance sheet.
We have extended the duration of our debt book through a combination of retiring short-dated debt and issuing $4 billion of longer-dated debt, including $1.8 billion of 40-year bonds. Now let me update you on our financial frame.
We have provided a clear set of principles and priorities for our uses of capital, and these remain unchanged. Our resilient dividend remains the first priority within our disciplined financial framework.
Reflecting the underlying performance of the business, an improving environment, confidence in our balance sheet, and commencement of a share buyback program, the Board has announced the increase in the second quarter dividend we mentioned earlier. Importantly, this increase is accommodated within our 2021 to 2025 average cash balance point of around $40 per barrel Brent, $11 per barrel RMM and $3 Henry Hub, all 2020 real.
Our second priority is to maintain a strong investment-grade credit rating. This is very important to us and why the dividend increase has been sized to maintain a $40 balance point and why we continue to allocate 40% of surplus to the balance sheet.
Our third and fourth priorities remain unchanged, and we are tightly focused on capital discipline, especially in an increasing price environment. Last, taking into account the $2.4 billion surplus cash flow generated in the first half of the year, BP intends to execute a share buyback of $1.4 billion prior to third quarter 2021 results.
And for 2021, the Board remains committed to using 60% of surplus cash flow for share buybacks. On average, based on BP's current forecast at around $60 per barrel brand and subject to the Board's approval each quarter, we expect to be able to deliver a buyback of around $1 billion per quarter and to have capacity for an annual increase in the dividend per ordinary share of around 4% through 2025.
Other elements of the financial frame are unchanged. The Board will take into account factors including the outlook for surplus cash flow, the cash balance point and the maintenance of a strong investment-grade credit rating in setting the dividend per ordinary share and in setting the buyback amount each quarter.
We expect to outline plans for the fourth quarter share buyback at the time of our third quarter results. In summary, we believe our disciplined financial frame allows us to focus on strengthening our balance sheet, provide committed distributions to shareholders through a resilient dividend and share buyback with upside to higher prices and the capacity to invest to transition BP for the future.
Thanks for listening. And now let me hand you back to Bernard.
Bernard Looney
Thanks, Murray. So a few words on our strategy.
As I said earlier, we have made strong progress in the last year. In resilient hydrocarbons, the engine of our transformation, we have brought 8 major projects online, adding around 200,000 barrels of oil equivalent a day of high-margin production.
We have more than doubled our renewables pipeline to 21 gigawatts. We have entered offshore wind and are building businesses in 2 markets that are among the world's largest and fastest growing.
We now have around 11,000 EV charging points in some of the world's busiest markets, over 40% higher than reported at the end of 2019. We have taken our first positions in hydrogen and CCUS, planning industrial-scale green hydrogen in Germany, 1 gigawatt of blue hydrogen at H2Teesside, and we intend to lead the way on building the U.K.'
s first decarbonized industrial cluster. And in the last few weeks, we have made 2 significant announcements in our low carbon and convenience and mobility businesses.
First, in the U.K., where together with our partner, EnBW, we have submitted a bid on offshore wind acreage off the East Coast of Scotland. The lease could support up to 2.9 gigawatts of generating capacity.
And if the bid is successful, we expect Aberdeen to become our global center of excellence for offshore wind. This would mark another step towards our ambition of scaling our global offshore wind position.
Second, in the U.S., we announced our plans to take full ownership of the Thorntons joint venture. Once complete, the transaction will position BP as one of the leading convenience operators in the Midwest and combine Thorntons' customer-first culture with our existing U.S.
retail network. We expect to deliver further value from synergies with our existing ampm brand and through integration with our refining, midstream and trading capabilities in the region.
Each of these steps is an important strategic milestone in their own right. Together, though, they show a pattern of emerging integration and how that can amplify value.
And that's what I would like to talk about in a little bit more detail. So let me start with some core beliefs: That as the energy transition unfolds, electrification will grow, the energy mix will become more diverse, more integrated and more local and customers will demand more bespoke solutions.
Let's take the U.K. as an example.
For over 50 years, BP has been an integrated oil and gas company in this country, producing oil and gas from the North Sea and bringing it to shore to process and refine, providing customers with gasoline for their cars at our service stations, including sandwiches and coffee, and providing natural gas to the grid to heat homes and supply industry through our trading relationships. Over time, the U.K.
has had to import oil and gas as well, and BP has enabled that, bringing natural gas from overseas to the Isle of Grain or shipping products from our refineries in Europe. As we look forward, that energy system is transitioning.
Over the coming decades, we see the energy mix changing, with oil and gas supplied from the North Sea slowly shifting to cleaner sources. The electrons generated from offshore wind flowing to shore, along with natural gas from the basin or from other nations, that gas flowing into power plants and requiring CCUS to decarbonize with CO2 put back into formations offshore.
Those clean electrons servicing the needs of customers of the future for home heating, for electric vehicles and for trucks, hydrogen growing and supporting heavy-duty transport, industry and potentially homes and perhaps 1 day the U.K. exporting hydrogen in the form of ammonia, an exciting future opportunity.
And we at BP are helping drive this transition with a plan to leverage the transferable engineering skills and capability from across our organization, moving from developing upstream megaprojects to world-class offshore wind projects. And working with the same supply chains and employers, construct CCUS and hydrogen plants, leveraging the experience that we have developed in high-hazard operations over the past 100 years.
Transform the retail footprint of the U.K. from fuel and convenience to a forecourt of the future.
With charging and convenience with our pulse brand, where we plan to grow EV charging points from around 8,700 today to more than 16,000. Our leading convenience offer with Marks & Spencer's.
And helping fleets shift from fuel to charging, such as the agreement we have with Uber here in London. All of this is underpinned by our strong balance sheet, our project skills, our digital skills that are so important in the connected economy, our marketing expertise and very importantly, our global trading organization with their huge customer network.
And while we understand the questions in some investors' minds, we do see a compelling proposition to deliver competitive returns across these value chains. Returns in offshore wind can be stable for 15 to 20 years as we sign up CfDs and PPAs, a much more stable prospect than oil price volatility of the past.
Returns in hydrogen and CCUS are yet to be established, but they will need to be higher given the risk and are likely to be stable for the first developments. Returns in charging and convenience are even stronger.
And the magic comes when we use our trading capabilities to optimize between the upstream energy flows and the different customers we interact with, from corporate PPAs to electric charging points for individuals or fleets, to blue or green hydrogen, providing fixed or variable volumes, providing fixed or floating prices in whatever currency they want with carbon offsets if needed. This is a replica of what we do in our trading business today, which gives us confidence for the future.
And this is not unique to the U.K. With our deep regional experience, we see the same opportunity to replicate this in other core markets.
In fact, there are currently over 3,000 corporates, 700 cities and 30 regions committed to net zero by 2050, collectively covering nearly 25% of global CO2 emissions and over 50% of GDP. This is both a huge commitment and a huge challenge and is where we see the opportunity for BP to step in and help our customers manage the complexity associated with their energy transition goals and, in doing so, create value for BP.
And we have a strategy designed for this purpose. Our region cities and solutions team has a unique remit, aligned with our Aim 10, to partner with cities, corporates and industries to create integrated clean energy and mobility solutions through the energy transition.
And we are seeing more opportunity than we imagined a year ago, and we have a large hopper of opportunities. We are in action, prioritizing customers in high emitting sectors.
Here are a few examples of what the team has been working on over the last few months. We will work together with CEMEX to develop solutions to decarbonize their cement production, including low carbon power and transport, energy efficiency, hydrogen, CCUS and natural climate solutions.
We have partnered with Qantas to cooperate on sustainable aviation fuel supply and other carbon reduction opportunities for their customers. We are progressing our partnerships with Aberdeen and Houston and have signed an MOU with the Ministry of Energy in Azerbaijan to jointly assess the potential for large-scale decarbonized and integrated energy mobility systems in the country.
We have agreed to supply long-term renewable power to Microsoft and Amazon data centers, and are collaborating with Microsoft specifically to bring an intelligent edge to our production facilities. In summary, for over 100 years now, we have been an IOC.
For the next 100, we will be an IEC, helping countries such as the U.K. and customers -- some existing, many new, to provide energy that is affordable, reliable and clean.
So before we turn to questions, a few words to close. Over the last year, our attention has been on reinventing BP, reorganizing and taking our first steps to become an integrated energy company.
That phase is now largely complete. We are delivering against the plans that we laid out.
Our businesses are performing well. We are growing cash flow and distributions.
We are strengthening the balance sheet, and we are confident about the future, while recognizing that uncertainties remain. In summary, we are performing today while transforming BP for tomorrow, delivering on the 3 core elements of our investor proposition we laid out just 1 year ago: of committed distributions, generating competitive cash returns through our resilient dividend and execution of buybacks; of profitable growth, growing cash flow with per share growth supported by our buybacks; and of sustainable value as we invest with discipline into our low carbon and transition businesses, all in service of delivering long-term value for our shareholders.
Thank you for listening. And Craig, now over to you.
Operator
[Operator Instructions].
Craig Marshall
Thanks, Martin. Okay, there are a couple that are pulling for follow-up questions, but I think in the interest of time, we'll close the call there.
And for those of you that did want to follow up, clearly on the sell side, we look forward to talking to you this afternoon. And I think on that note, maybe let me hand over to Bernard for some closing remarks.
Thank you.
Bernard Looney
Very good. Well, thanks, Craig, and thanks, Murray, as always.
And thanks, everybody. Just four things I would say to close out the call, if that's okay.
First of all, I hope you'd agree that it's another strong quarter of delivery, and we have got to remain focused and will remain focused on execution of our strategy. So another strong quarter of delivery number one.
Number two, we're doing it consistently. We're not changing our investor proposition.
We're not changing our financial framework. We're not changing our capital guidance.
We're not doing anything like that. We are doing it consistently.
And thirdly, I think we're growing in confidence a little bit while, of course, being cognizant of downside risks, but we're growing confidence in the underlying business, in the balance sheet and in the outlook for the environment. And then fourth and finally, we're doing what we said we would do.
I hope you can see, which is that we would perform while transforming. We would deliver for our shareholders today.
And by that, we mean cash and cash distributions. And today, we've grown our distributions, and we've realtered the balance a little bit in favor of dividends.
And we're also transitioning the company for the future, something that we think is vitally important, and we're making steady, disciplined progress on doing that. So this concept that we rolled out actually on the 12th of February 2020, which was performing while transforming remains at the core of our proposition to investors.
So I just want to thank you all for your interest in the company, for your feedback this morning, for your great questions. And I hope you guys get a break with family and friends, and look after yourselves, and we'll be in touch.
So thanks very much.