Image source: BP via Flickr.

BP (NYSE:BP), like all of its large oil and gas peers, has been under a lot of pressure from Wall Street to get its spending habits under control. The rapid decline in oil prices over the past two years has left them dipping into the debt markets and selling off large chunks of assets to meet the funding needs of their large development projects.

As BP wraps up several of those projects, management is making a hard push to close the funding gap and get back to both profits and free cash flow, and these recent quotes from BP CFO Brian Gilvary explain how the company plans to do it. 

Reducing capital spending even more than before

BP gained a very valuable lesson from the Macondo spill in 2010. With so much cash going to pay for the spill, the company needed to learn how to stretch its capital spending budget as much as possible by focusing on its highest-return projects. That lesson is actually paying off a bit as of late, because BP is now using that tight-fisted approach to capital spending as a way to deal with low oil prices. According to CFO Brian Givary, the company is cutting back on spending even more than originally anticipated:

We continue to make strong progress on resetting both the capital and cash cost base of the group. We now expect capital expenditure in relation to the current portfolio to be around $17 billion this year. We see room to reduce this to between $15 billion and $17 billion per annum for 2017 in the event of a continued low oil price. This compares to our guidance in February of $17 billion to $19 billion per annum for the same period, while at that time, 2016 spend was expected to be at the lower end of that range.

Big cost cuts

On top of the big cuts to spending on new projects, the company is also using this time of low oil prices to drastically lower its operating budget. According to Gilvary:

The group's cash costs over the last 4 quarters were $4.6 billion lower than 2014. This demonstrates the ongoing momentum behind our efforts to reduce costs and put us about 2/3 of the way through to delivering the $7 billion of cash cost reductions by 2017 compared to 2014.

Cutting $7 billion out of its operating costs will go a long way toward restoring profitability at BP, but those cost-cutting efforts need to be sustained over a couple of years. Hopefully that will be a lesson that will last longer past other major price drops. 

Getting closer to meeting cash needs

The reason the company is going through all of these massive cost and capital cuts is because it has one major priority: Protect its dividend payment to shareholders. After all, for a large company in a cyclical industry like BP is in oil & gas, a constant dividend payment is one of the core parts of the investment thesis. Thanks to these cost-cutting measures, Gilvary notes the company is lowering its cash breakeven cost per barrel of oil:

We have been working toward a goal of rebalancing [cash flows] by 2017 at the prevailing oil price, which back in October 2015 we pegged at $60 per barrel, consistent with the forward curve at that time. As we steadily take more costs out, the Brent oil price at which we would expect to breakeven continues to move lower. We now anticipate rebalancing organic sources and uses of cash by 2017 at oil prices in the range of $50 to $55 per barrel. This currently defines the basis for our ongoing commitment to sustaining the dividend as the first priority with our financial framework.

Getting into that $50 to $55 a barrel range would be rather impressive considering that the company's breakeven was well above $70 just a few years ago -- then again, most thought this was fine when oil was consistently above $100 a barrel. Investors should keep an eye on this breakeven number and where it goes from here. In the short term, it would be handy if BP could lower it a little more to come in line with the market. Longer term, we don't want to see it tick up, regardless of what oil prices do. 

Some growth left in the tank

For a long-term investor, a big concern is that the decline in capital spending today will result in a lack of growth. Or even worse, a lack of new production to offset natural production decline. According to Gilvary, though, the company still has a lot of room to grow profitable production into the next decade:

Overall, we continue to have momentum on our Upstream major projects portfolio as we look beyond this year. Our 2017 start-ups are on track, and together with our 6 2016 start-ups, we expect to put in place 500,000 oil equivalent barrels per day of new net BP capacity by the end of 2017 versus 2015 ... Beyond these 2017 start-ups, the production facilities for our Shah Deniz Phase 2 project are ahead of plan at around 70% completion, with first gas scheduled for 2018. All of this means we remain on track for the delivery of over 800,000 barrels per day of production from new major projects by 2020.

The real big one to watch here is the Shah Deniz project. This massive natural gas field in the Caspian Sea is one of those megaprojects that has stymied companies in recent years -- think the cost overruns at ExxonMobil & Royal Dutch Shell's (NYSE:RDS.A) (NYSE:RDS.B) Kashagan project and Chevron's Gorgon LNG facility. It should bring on lots of profitable production, but it needs to keep it on time and on budget. 

The other question investors may want to ask, though, is whether these cost cuts will catch up to the company beyond these projects.

No big purchases on the horizon

As oil and gas prices have fallen over the past two years, Wall Street has clamored for Big Oil companies to make some big acquisitions while stock prices are cheap. So far, though, the only one to pull the trigger on a major deal has been Shell with the $52 billion acquisition of BG Group. When asked whether BP sees any potential to make an acquisition, Gilvary had this response:

So the M&A market, as it stands right now in the Upstream is, there's a lot of assets out there available. I think one of the overarching principles, and it comes all the way back to October 2011, is this concept of making sure of its value, and its value accretive for our shareholders. So we have looked across the market. We've looked at various options around infill asset acquisition around existing positions that we have, all strategic infill options for us. I think the key test has to be that it's accretive for shareholders. And to the degree things are dilutive, then really you question, "why you would be using your cash on that?" So we have done some small acquisitions. We've done some -- last quarter, we mentioned some in the Lower 48 that we did around some of our existing positions in the San Juan basin. And we will continue to look at where we can see an asset acquisition, where we believe we can add value. Typically, we may be the operator or deepening in those positions or indeed, actually looking at swap options. But it's been pretty tough to actually find things, which are value-accretive in the current market, and there are a lot of assets up for sale right now. So we'll continue to look and see.

Basically, he's saying, "no large deal has blown us away yet and we're focused on other stuff, but we'll keep and ear open." This is pretty much the same line execs at ExxonMobil and Chevron have been saying for a while as well.

Part of what they are saying could be true, and no deal out there today looks like a huge steal, but you also have to take into account that the currency each company would use for a deal -- likely shares of their companies -- aren't exactly selling for a premium right now and would potentially lead to some unnecessary dilution. Perhaps once these companies get their cash-flow statements cleaned up, we might hear a few more whispers on the merger front. For now, though, the rumor mill will remain rather quiet. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.