BP plc (ADR) (BP) Keeps Capex Lower; a Wise Decision

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The Country Caller takes a look at BP’s decision to not increase Capex for current year

In the aftermath of oil crash, many exploration & production (E&P) companies trimmed their capital expenditures (Capex). Similar is the case with BP plc (ADR) (NYSE: BP), which in June last year stated that it would keep its Capex between $15-17 billion if the oil prices continue to remain low.

However, oil prices have recovered since then, and have been trading above $50 a barrel for past couple of months. Still, BP has presented its plan to keep its Capex at $16 billion. This might seem strange, as higher spending would mean higher production in future, and with higher realized prices, it would just be better for the company.

The rig count data is on rise, and depicts that exploration activity is picking up pace. Even Schlumberger CEO stated that E&P activities would increase by 30% in North American region this year.

The Country Caller believes the decision is a step in the right direction since BP is currently suffering from the aftermath of oil spill in Gulf of Mexico, costing it billions of dollars. Increasing Capex would result in cash burn and offset the possible increase in the British company’s topline numbers due to higher realized prices.

As for the long-term production plans, BP is reportedly working on asset sales program, but still not in dire need of Capex to increase production. So far, the company has plans to initiate operations at six of its projects this year, which are expected to keep its production numbers intact.

It’s very important for the British E&P major to preserve liquidity due to volatile nature of oil prices along with cash burn in the lieu of oil spill. We advise investors as well as BP to sit back and enjoy higher oil price.

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