BP's (NYSE: BP) struggles over the past few years have been well documented. Facing multibillion-dollar payments related to its role in the 2010 Deepwater Horizon disaster, the British oil giant has struggled to generate sufficient cash flow to cover its high level of capital spending.
A cursory look at the company's recent financial performance would seem to suggest that not much has fundamentally changed. It is still unable to bring in enough cash to cover its spending, with 2013 capital expenditures coming in at $24.6 billion, compared with just $21.1 billion in post-tax operating cash flow.
But this trend is set to reverse this year, with the company expected to generate enough cash flow to cover its expenses for the year and with plenty left over for dividends. Let's take a closer look at the main factors that will allow BP to finally return to material growth in operating cash flow and return more cash to shareholders.
Major 2014 project start-ups
The first big reason is the start-up of six major projects this year, including BP-operated Na Kika Phase 3 in the Gulf of Mexico and Kinnoull in the U.K. North Sea, Total-operated (NYSE: TOT) CLOV offshore Angola, and Husky Energy-operated (TSX: HSE) Sunrise Phase 1 in Canada's oil sands, as well as two other projects -- Mars B in the Gulf of Mexico and Chirag in Azerbaijan -- that have already started producing oil.
Crucially, all six of these are high-margin oil projects and will provide a big boost to production and cash flows, assuming a $100 Brent price. For instance, production from Mars B -- a deepwater oilfield operated by Royal Dutch Shell (NYSE: RDS-A) with a 71.5% stake, alongside BP, which holds the remaining 28.5% stake -- is expected to reach a peak of 100,000 barrels of oil equivalent per day, or boe/d, up from 60,000 boe/d last year. The field is currently being developed using Shell's Olympus tension-leg platform.
Whiting refinery and working capital reversal
In addition to these projects, the start-up of BP's upgraded Whiting refinery in Indiana will also provide a substantial boost to cash flow. After completing significant upgrades at the facility last year, including the reconfiguration of its 250,000-barrel-per-day crude unit and the addition of a new gas oil hydrotreater, BP brought the 413,000-barrel-per-day refinery on stream in December.
As a result of the upgrades, the plant can now process heavy, sour crude for up to 80% of its crude feedstock slate, up from 20% before the modernization initiatives were completed. Given the stronger margins from using discounted heavy crude as a feedstock, BP expects the plant to generate at least $1 billion in operating cash flow this year.
Lastly, 2014 cash flow will also get a big boost from the reversal of working capital build, which was around $5 billion last year. This large build of working capital -- defined as the difference between current assets and current liabilities -- was one of the main factors negatively affecting the company's underlying cash flows last year.
The reason for this is that an increase in working capital is treated as an outflow of cash, since cash tied up in working capital can't be used for other purposes and doesn't generate returns. But with less cash to be tied up in working capital as the year progresses, BP expects to reduce last year's working capital build of $5 billion by about two-thirds.
The bottom line
BP's likely return to material growth in operating cash flow this year is a hugely positive development, because it will allow the company to sustain its hefty dividend, which it raised by 5.6% in October. This year, BP expects to generate $30 billion to $31 billion in operating cash flow with capital expenditures of $24 billion to $25 billion -- a trend it expects to continue for the foreseeable future.
Furthermore, the company plans to sell another $10 billion of assets through 2015, with much of the proceeds going toward returning cash to shareholders, mainly through share buybacks. Last year, the company returned nearly $11 billion in cash to shareholders through dividends and share buybacks.
Still, despite these positive developments, the uncertainty regarding the outcome of the ongoing litigation related to the 2010 oil spill will continue to weigh on BP's share price. If the company is deemed grossly negligent for its role in the disaster, it could add tens of billions to its final bill, placing added stress on its cash reserves and likely forcing it sell more assets.
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