Earnings Call Transcript - BP Q4 2023

Operator, Operator

Good morning, everyone, and welcome to BP's Fourth Quarter and Full Year 2023 Results Presentation. I'm delighted to be here today with our newly appointed Chief Executive Officer and Chief Financial Officer; Murray Auchincloss; and Kate Thomson. 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, along with this presentation, are available on our website. Let me now hand over to Murray.

Murray Auchincloss, CEO

Good morning, everybody. Thanks for joining us today here at St. James. We've done this before, haven't we? But it's the first set of results where I have the privilege to talk to you as CEO of BP. It's a great company. It has great people, and it's an honor to lead. Our destination is unchanged, IOC to IEC, international oil company to integrated energy company. We're confident in our strategy to deliver this, but how we are going to do so is as a simpler, more focused and higher value company, providing energy solutions for our customers who are asking us to help, contributing to the energy transition, all the while remaining pragmatic and adapting in line with demand, as you saw with the update to our strategy this time 12 months ago. So what does it practically mean to transition from IOC to IEC? Over 100 years ago, we started to create our first value chain, oilfields attached to refineries, with products sold in service stations and airports. We're now introducing biofuels, sustainable aviation fuel and biodiesel to the customer. At the same time, we're lowering the carbon footprint of our plants by using lower carbon hydrogen and electricity for power. Why? Because we can deliver higher margins with lower emissions. Over 60 years ago, we started to create the second value chain, natural gas fields linked to domestic pipeline systems and eventually liquefaction plants. We're now introducing biogas, carbon sequestration and lower carbon electricity to the customer. Why? Because we can deliver higher margins with lower emissions. Over the past 4 years, we've been accelerating our efforts to create a third value chain, lower carbon power and hydrogen. For example, using solar-wind to create lower carbon hydrogen to provide to our plants and customers and using those electrons to service the growing electricity demand through our EV charging business. Why? Because we can deliver higher margins with lower emissions. All of these chains are then optimized by our fantastic trading organization, driving superior returns to what a pure play can deliver. And the more we can interlink them, the more we can expand the returns. Over the past 4 years, we've delivered, on average, around a 4% uplift to group return on average capital employed across these chains through these efforts. We think this is a sector leading. Now across all these chains, we've always have choice about how much we produce ourselves in the upstream or purchase from other producers. That equally applies to oil, natural gas and renewables. The magic is getting that mix right inside our business lines to optimize returns and trading optionality. The most important part is to ensure absolute discipline in investing capital, ensuring we hit our return thresholds across these value chains. That's what an IEC is to me, investing in today's energy system while building out tomorrow's, lower carbon, higher margin. Now it's 4 years in. We've learned a lot and adapted along the way. It's made us stronger, more confident in the growth we have coming and more convinced about the value we can create. I'm passionate about this strategy, as I think there are only a few companies globally that can do this at scale. And as we deliver, we will grow the value of BP, and that's what I'm focused on, growing the value of BP. So what should you expect from us moving forward? As always, let's start with safety. We're making good progress, but there's always more we can do. Delivering safety is very important to me, and it's very personal. 4 generations of my family have worked in the sector. My great grandfather actually died in an industrial accident. And I can remember my father teaching me about the dangers of hydrogen sulfide in a natural gas field as a child. We work in a high hazard industry. And every day, we must make sure everyone comes home safe. That's our first priority. The past few years have been about generating options. Now we will focus our efforts on the key areas where we can be competitive, and we'll simplify the business. We'll pursue this in every way you can imagine from origination to our narrative. We will be relentlessly value and returns focused with our investments, focused on growing value and returns from our oil and gas portfolio, leveraging our high-quality resource base and driving efficiency and reliability, as we laid out in our update in Denver last year and growing value from our transition businesses as we invest with discipline in the pipeline we have developed and by creating even more value through integration. We will continue to be pragmatic in our approach to how we navigate this energy transition. Yes, we want to help scale lower carbon energy value chains and position ourselves to profit from them, but we must remain flexible, adjusting in line with changing demands and societal needs, as you saw us do in February last year. And we have a tremendous team delivering this, and I want to ensure we place engineering science and technology, both digital and physical at the heart of the company. I've seen firsthand the impact and possibilities of innovation and digital solutions, including across upstream and expanding our customer offer and improving our back-office processes. And some of you saw this for yourself in Denver. What's really exciting is that we see potential to do even more to transform our businesses. We've been working with AI, including machine learning and computer vision models for more than 5 years, and we have over 100 live AI use cases across the business now. These present enormous opportunity to help us capture increased margin and decrease spending. And finally, you can expect to see us continuing to make full use of our creative commercial muscle to optimize how we invest and create value with Aker BP and Lightsource bp providing excellent examples for the future. So to sum up, the destination is unchanged, but we're going to deliver as a simpler, more focused and higher value company, unlocking the full potential of our assets and our people and growing the value of BP. So let's turn to 2023 and what was a year of continuing delivery. Starting with safety, we have seen improvements in our safety performance, reducing our Tier 1 and Tier 2 process safety events, but we have more to do. We need to keep improving to eliminate all Tier 1 process safety events, continuing to apply OMS and constantly reinforcing and building on our operating culture across the business. Next to our business performance, where we have delivered resilient operational and financial performance in 2023. Adjusted EBITDA was $43.7 billion. Operating cash flow was $32 billion. Net debt reduced to $20.9 billion, and average return on capital employed was 18.1%. We are executing our strategy with discipline across our oil and gas business and our transition growth engines, as I'll come to in a minute. And we are delivering competitive shareholder distributions. We grew our dividend for ordinary shares by 10% last year. Today, we announced a further $1.75 billion of share buybacks, bringing our total buybacks announced from 2023 surplus cash flow to $6.5 billion. We have seen strong momentum in our operational and strategic delivery in 2023. Starting with oil and gas. Our upstream production grew by 2.6%. We started up 4 major projects that we expect to contribute more than 50% towards our target of 200 mboe/d by 2025. BPX production grew by 13%, surpassing 400 mboe/d in the fourth quarter. We managed base decline between 3% to 5%, supported by high return investments and new well delivery and well work. And in refining, availability was over 96% for the year. Our LNG supply portfolio increased by 20% to around 23 million tonnes per annum, largely driven by Coral and Freeport. In addition, we delivered 10 million tonnes per annum of incremental short- and mid-term merchant volumes. We completed Atlantic restructuring, enabling the next wave of projects in Trinidad and securing long-term LNG equity offtake. We accessed 44 exploration blocks in Gulf of Mexico, Canada, Brazil, and Deepwater Trinidad. Our unit production cost was around $6 per barrel of oil equivalent, in line with our 2025 target. And proudly under aim 4, we met our first goal of deploying our methane measurement approach across all our existing major operated upstream oil and gas assets by the end of 2023, a very important milestone. Turning to our transition growth engines in Bioenergy. We increased our biofuels production by 18% year-on-year and biogas supply volumes by 80% year-on-year, reflecting the uplift from Archaea. In convenience, we delivered 60% growth year-on-year in gross margin, including the contribution of TravelCenters of Americas. Excluding TravelCenters, we've maintained strong underlying growth of 9% year-on-year, building on the average 9% per annum over the previous 3 years despite recessionary forces. In EV charging, we are rapidly building scale and demonstrating profitability in Germany and our JV in China. Energy we sold rose by 150% year-on-year, supported by a 35% increase in the number of EV charge points and increasing utilization. Importantly, our charging customers in the U.K. are spending more in our shops than our fuel customers. This gives us further confidence in our fast on-the-go business model. We grew our hydrogen pipeline to 2.9 million tonnes per annum. Our focus this decade is on blue hydrogen and decarbonization of our refineries while laying the foundation for green hydrogen production towards the end of the decade. In renewables and power, we grew our renewables pipeline to 58.3 gigawatts net to BP, including the offshore wind award in Germany, Lightsource bp's pipeline and our onshore renewables projects supporting hydrogen in Australia. And we have agreed to take full ownership of Lightsource bp, one of the top solar providers globally, a fantastic business with a track record of delivering equity returns in the mid-teens over the past few years with our development flip model. Integrating all of these are trading and shipping businesses, as I described earlier. This is our strategy in action, and we have more to come in '24 and '25 that I'll describe later. But for now, let me hand over to Kate to take you through our fourth quarter results and our financial frame.

Katherine Thomson, CFO

Thanks, Murray, and good morning, everyone. I've been here once before, and I echo Murray's sentiment. It is an honor to speak with you as CFO. Let's turn to our results. BP's focus on delivery supported another quarter of strong underlying operational and financial performance. Our upstream volume was 2.3 million barrels of oil equivalent per day, in line with our guidance. Gas and low carbon energy production was around 900,000 barrels of oil equivalent per day. The underlying financial result was around $500 million higher than the previous quarter, largely reflecting a strong gas marketing and trading result and stronger gas realizations, driven by higher gas prices. This was offset by a non-cash write-off of around $300 million, largely related to the exit from a production sharing contract in Senegal and by lower production. In oil production and operations, production was 1.4 million barrels of oil equivalent per day. The underlying result was around $400 million higher than the previous quarter, largely reflecting favorable price lag impacts in the Gulf of Mexico and UAE. In customers and products, the underlying result was around $1.3 billion lower than the previous quarter. Looking at the businesses. In our customers' business, the underlying profit was $880 million, around $200 million higher than the previous quarter. The result benefited from stronger-than-expected fuel margins driven by a decline in supply and a one-off positive effect of around $100 million. This was partly offset by lower seasonal marketing volumes as well as higher costs in support of our transition growth engines. In products, the underlying loss was $80 million compared to $1.4 billion profit in the third quarter. The result reflects significantly lower industry refining margins, albeit with a smaller decrease in realized refining margins because of wider North American heavy crude oil differentials. In addition, as we guided, there was a higher level of turnaround activity, including a full site turnaround at Castellon. The oil trading result was weak compared to the very strong result in the third quarter. Results from our other businesses and corporate segment improved around $200 million on the previous quarter, largely due to foreign exchange gains. And as we've said before, results in this segment do vary quarter-on-quarter. Reflecting these factors, we reported an underlying replacement cost profit before interest and taxes of $6.1 billion. After interest and taxes, we reported group underlying replacement cost profit of $3 billion. Our underlying effective tax rate increased in the fourth quarter to 42%, mainly reflecting profit mix effects. And on an IFRS basis, we recorded net adverse adjusting items of $1.5 billion after tax, primarily related to impairments, reflecting changes in the group's price, discount rate, activity phasing and other assumptions, partially offset by fair value accounting effects. We also recorded inventory holding losses of $1.2 billion during the quarter. Taking into account these items, we reported a headline profit of around $400 million. Turning to cash flow and the balance sheet. Operating cash flow was $9.4 billion in the fourth quarter, around $600 million higher than the third quarter. This was largely due to a higher EBITDA and lower cash taxes compared to the third quarter related to the timing of tax installment payments. Operating cash flow included an underlying working capital release of $2.1 billion, largely associated with the delivery of LNG cargoes. Capital expenditure was $4.7 billion, which is $1.1 billion higher than the third quarter. This brought full year CapEx to $16.3 billion, which is broadly in line with our guidance. Divestment proceeds were $300 million, bringing the full year to $1.8 billion. That's slightly lower than our guidance. And the $1.5 billion share buyback program we announced with the third quarter 2023 results was completed on the second of February. Our balance sheet continues to strengthen with net debt reducing to $20.9 billion. That's the lowest level for a decade. As you saw this morning, we've announced a 4Q dividend of $0.0727 per ordinary share, an increase of 10% compared to last year. And as Murray mentioned earlier, we announced $1.7 billion of share buybacks from 2023 surplus cash flow. As you can see on the chart, in total, we've now bought back over 16% of our issued share capital, since we started our buyback program in 2021. To sum up, it's been another good year of delivering against our financial frame. Let me now take you through the guidance on our financial frame for the next 2 years. Our 5 priorities remain unchanged. Given the strength of our underlying financial performance, the disciplined approach to strengthening the balance sheet over the last few years and our confidence in our drive towards 2025, we now have the capacity to update our financial frame and provide clear guidance for the next 2 years through 2025. We're tightening our capital expenditure guidance, enhancing our share buyback guidance, all while continuing to maintain a strong balance and a strong investment-grade credit rating. As Murray said earlier, we're focused on simplifying things where we can. Our first priority remains a resilient dividend accommodated within a balance point of $40 per barrel Brent, $11 RMM and $3 Henry Hub. With capacity for an increase in the dividend per ordinary share of around 4% per annum at around $60 a barrel, subject, of course, to the Board's discretion each quarter. Our second priority is our strong investment-grade credit rating. We're targeting to further progress our credit metrics within the A-grade credit range through the cycle. We're not targeting a AA credit rating. Third and fourth, we plan to invest with discipline. We're driven by value and focused on delivering returns at least at our hurdle rates across our transition growth engines and our oil, gas and refining businesses. Capital expenditure is now expected to be around $16 billion per year through 2025, including inorganics. And finally, to share buybacks. As I said, we're simplifying and enhancing our guidance. For the first half of 2024, we're committed to announcing $3.5 billion. That's $1.75 billion per quarter for each of 1Q and 2Q. This provides near-term predictability. And to be clear, this is in addition to the $1.75 billion share buyback we announced today for the fourth quarter of 2023. Over 2024 to '25, subject to maintaining a strong investment-grade credit rating, our expectation, assuming current market conditions, is to announce at least $14 billion of share buybacks in total. And on a point-forward basis, we're now committed to returning at least 80% of surplus cash flow. This is an enhancement to our previous guidance of 60%, and it's an affordable range underpinned by two things, the strength of our balance sheet and our confidence in the future performance of our business. Let me now close with a summary of our forward-looking guidance before I hand back to Murray. This slide is a little detailed, but it summarizes guidance for the full year ahead and the quarter ahead, and it's all in one place for you. I'm not going to read it line by line, but let me start just by highlighting some points in relation to the first quarter 2024 compared to the fourth quarter. We expect upstream production to be higher. And in customers, we expect seasonally lower volumes across most businesses and the absence of one-off positive impacts. Fuel margins remain sensitive to movements in cost of supply. In products, we expect a significantly lower level of refinery turnaround activity. And in addition, we expect lower industry refining margins with a larger reduction in realized margins because of narrower North American heavy crude differentials. And with regard to the full year 2024, we expect this year's capital expenditure to be weighted to the first half, while our target of $2 billion to $3 billion of divestments and other proceeds is expected to be weighted to the second half. And as Murray mentioned, our trading business has delivered on average an uplift of around 4% to group over the past 4 years. This slide forms part of some enhancements we're implementing to help the investment community. Starting with the first quarter 2024, we also plan to introduce a regular trading statement to provide our investors with up-to-date financial performance insights. Today's announcement and our updates to the financial frame, together with our detailed guidance, we hope provides more clarity for the market. And with that, I'll hand it back to Murray.

Murray Auchincloss, CEO

Thanks, Kate, nice to have her CFO, upgrade on the previous guy. Over the next 8 quarters, we're focused on delivering our 2025 targets, our drive to 2025. We are confident in achieving these for two reasons. First, we're clear on what businesses need to deliver. And second, we have strong momentum, as I've previously described. In oil and gas, we expect to start up 6 new major oil and gas projects, bring online 2 new central processing facilities in the Permian and BPX, Checkmate and Crossroads, I love their names. And equity and merchant supply to our LNG portfolio that underpins our 25 by '25 target. We'll continue to leverage our distinctive delivery model across project and operations to deliver plant reliability at around 96%, maintain base decline of 3% to 5% and $6 per barrel of oil equivalent unit production cost. In refining, we expect to drive greater competitiveness and value through our digitization and business improvement plans, including maintaining Solomon first quartile net cash margin. In Bioenergy, we expect to more than double our biofuels coprocessing volumes to around 20,000 barrels per day in 2025, investing in our advantaged refining portfolio. In biogas, we started about 5 gas plants in 2023, and Archaea expects to start up between 15 to 20 new plants per year through 2025. In convenience and EV charging, we plan to deliver EBITDA of more than $1.5 billion in 2025. In convenience, we are focused on the rollout of strategic convenience sites supported by customer offers, strategic partnerships and digital investments and integrating TravelCenters of America, realizing deal synergies and expect to grow EBITDA to around $800 million in 2025 with convenience, a significant contributor. In EV charging, we plan to grow energy sales across our 4 key markets and expect to deliver positive EBITDA in 2025. In Castrol, we expect to drive EBITDA through volume growth, cost efficiencies and emerging new business areas. In hydrogen and renewables and power, we will remain disciplined and focused on value creation, establishing the capabilities and foundations for scalable and integrated businesses in the decades to come. Our recent announcement of the acquisition of Lightsource bp is a great example. We will continue to leverage the benefits of our integrated business model. We are advancing our technology and innovation agenda, moving past pilots and use cases to building our own custom generative AI products, and we are getting it in the hands of our global workforce. And our world-class trading business will continue to be the core of integrated and optimizing across our energy value chains to deliver higher margins and lower emissions. All in service of our target to grow EBITDA to $46 billion to $49 billion in 2025. Let me then sum up what you've heard and we'll get to your questions. 4 years in, our destination is unchanged. IOC to IEC, and we remain confident in the strategy. At its core is a laser-like focus on growing the value of BP, and underpinning this, we're going to be focused on 6 near-term priorities: first, improving safety, our first priority and reducing emissions. Second, driving further focus into the business. That means actively managing our portfolio and continued high grading and focusing on activities that create the most value. Third, delivering the next wave of efficiency, an area where I see a huge opportunity. For example, using global capability centers and our industry-leading digitization and technology expertise to increase margin and decrease spend. What some of you saw in Denver is just the tip of the iceberg, and we are now deploying that capability into the downstream. These efficiencies will feed into our fourth priority, that is progressing the next set of growth projects that we expect to sanction across the next 2 years. These projects provide growth through the end of the decade and into the next. And fifth, as you heard from Kate, we have disciplined investment allocation at the core of our financial frame, which is focused on optimizing return on capital employed. And finally, our sixth priority, we remain committed to growing shareholder returns including now returning at least 80% of surplus cash flow to shareholders through share buybacks. We know exactly what we need to do, and some of the key measures are up on the slide. You can monitor our progress quarter-to-quarter as we drive to 2025. In conclusion, we're investing in today's oil and gas system and building out tomorrow's, all in service of growing the value of BP. The direction is the same, but we're going to deliver as a simpler, more focused, higher value company that pragmatically adapts with demand and societal needs. And we look forward to updating you as we move through the year. With that, Kate, and I will be delighted to take your questions. Thank you.

Operator, Operator

No questions online yet. Let's see, where should we start. Michele, why don't we start with you, please. Limit yourself to 2 questions, please, if you can. That wasn't directed personally at you, Michele.

Unidentified Analyst, Analyst

Of course. It will only be two. And congratulations on the strong results. Two questions, if I may. The first one, when you talk about an A range credit metrics through the cycle, is there a simplistic way to bring it down to a net debt level that you would like to achieve in the course of the coming years? And my second question is on the transition growth engines. Clearly, you've got a very ambitious target in terms of EBITDA in 2025. It's more than a tripling of EBITDA, which goes well beyond the volume growth. I was wondering if you could help us a bit more understand where that increase in EBITDA margins would come from? Is it cost? Is it price? Is it cost-cutting and integration of the likes of Lightsource bp?

Murray Auchincloss, CEO

Fantastic. Thanks, Michele. I'll take the second question first, and then Kate, I'll hand over to you for the balance sheet question. On the TGs, yes, it's an aggressive growth profile from around $1 billion in 2023 to $3 billion to $4 billion by 2025. If you think about what we've done over the past few years, we've bought an awful lot of companies and now need to bring them in, standardize them and drive that growth through them. So the march from $1 billion to $3 billion to $4 billion, it starts with Archaea. We went slow on purpose to get the design right for rapid replication. We're now in action. We've got 5 plants online. We'll do 4 or 5 a quarter now, marching forward over the next 8 quarters. In TravelCenters of America, we brought it in. We're starting to deliver the synergies inside that. We see tremendous opportunity to introduce biofuels into it to enhance margins. We're probably going to beat the synergies on that. The company was not as efficient as we thought it might have been, so that delivers more opportunity as well. We'll have Lightsource bp coming in that will allow us to grow that business and absorb that EBITDA as well. And in Emma's business, we do continue to see really strong growth despite recessionary forces and convenience—9% year-on-year despite recessions, despite COVID, you name it. We've got a fantastic team that we brought in, that's really driving growth in that space as well. EV, earnings positive in 2 countries. We'll get everything to breakeven by 2025 as well. And of course, we'll tighten. We'll really tighten the focus on origination, not spend as much money on origination and really focus on what we're going to deliver moving forward. So I feel comfortable. It's a bold target to hit $3 or $4 billion, but I feel comfortable with it based on what we've done and I look forward to reporting back to you on that over the coming quarters. Kate?

Katherine Thomson, CFO

Thanks. Michele, thanks for your question. Let me just step back a minute and just make sure everyone is still very clear that the balance sheet and the credit rating, the stronger investment grade credit rating remains the second priority. That's fundamental to us. I think resilience of the company from a financial position is more than just net debt. And I like the way that the credit rating agencies think about the ratio of the cash that we're generating versus the total of our debt-like liabilities. I think that's a good measure of resilience. The change we're making today, which is moving away from targeting progress within the rating to being clear around progress within the metrics is I have control over that. We've got a great relationship with the rating agencies. We speak to them very regularly, but we can't control the rating outcome, and neither should we. We did get upgraded by Fitch in November. We remain on a positive outlook with S&P and Moody's. So let's see. We are well within the metrics for an upgrade, but that's it for them to decide. But from my perspective, it's about making sure that we are maintaining a balance sheet that is resilient, allows us to see through volatility, allows us to tolerate a perspective of environment that is going to move but also cash flows that are going to move around within a quarter. So you've seen from the guidance where we're guiding to heavier CapEx in the first half and heavier divestments in the second half. You're going to see our net debt move around. That's okay. We strengthened it so significantly in the last few years, down to this level, which is the lowest in a decade. That gives us a lot of confidence that we can tolerate that level of momentum. So I'm not going to put a net debt target out. I'm going to tell you I'm comfortable with where it sits right now and our ability to tolerate movement, and remind you that we will continue to obviously be putting around 20% of our surplus cash flow to the balance sheet. So it's going to continue to deleverage just at a slightly slower pace.

Biraj Borkhataria, Analyst

It's Biraj Borkhataria from RBC. I have two questions. The first is regarding your EBITDA targets, specifically for 2030 rather than 2025. In a previous footnote, you mentioned that your CapEx would be at the higher end of the range. In 2022, it was at 16%, and the same for 2023, but now you're guiding to the midpoint for 2024 and 2025, effectively halving the plan. Can you discuss the potential EBITDA impact from not spending that additional $2 billion, along with where these effects might be felt and how to approach this? My second question is about the dividend. You mentioned a 4% yield at 60; are you planning to explicitly connect that to the buyback program? Your share repurchase rate is noticeably faster than your peers, as indicated in your chart. Do you view these as two separate issues, or do you prefer the buyback over dividends?

Murray Auchincloss, CEO

Great. I'll tackle the first one. Kate, you grab the second one. So the long-term guidance on capital frame has not changed, $14 billion to $18 billion through the decade. What we are changing is we're getting more disciplined with '24 and '25 year, tightening in on a $16 billion range for these 2 years. I think the way that I relate to this, Biraj, is that we've done a lot of acquisitions recently, EDF, Archaea, TravelCenters of America, Lightsource. These are big transactions. They represent north of 2% of our overall value, which is similar to some of the big transactions you've seen in the United States from some of our competitors on an equity basis. And it's injecting a lot of people into the business. 19,000 alone inside TravelCenters of America. So it's time now to pause on acquisitions. We might do a few more, but to pause on them and instead focus on that hard work of integrating the systems, the people, the processes, the cultures of these entities, and that's really what we're focused on right now. As far as an EBITDA sacrifice, I remain very comfortable with our 2025 targets. I think in a $0.20, $0.30. We haven't really deviated from the '25 to '30 time frame so it's not anything material. So I think the latest numbers adjusted give or take, on our 46 to 49 target in 2025. We're at about 44. So I'm feeling pretty good about that as well. Strong, strong growth inside the upstream. And so I feel comfortable about '25. No change to 2030 at this stage. And in due course, we'll update the market on what we're thinking about for targets for 2030. Those, of course, are aims right now, Biraj. Hope that helps. And over to Kate.

Katherine Thomson, CFO

Thanks, Biraj. So on dividend, look, making sure that it's a resilient dividend, is really important to us, which is why we are keeping it as our first priority in the financial frame today. The reason we haven't created and I don't think we should create a link to share buyback is, of course, with the share buyback progress, the share count reduction occurs over time. We've got a very significant decrease in our share count reduction to date. That's going to continue, given what we've just laid out today. That gives the Board an ability to move the dividend per share up. But of course, the Board is going to take into consideration facts and circumstances every quarter, as it looks at the dividend, which will be depending on cash flow generation to date, what the outlook looks like, environment momentum. And they will take that decision as and when we get to each quarter. I don't think linking it to a particular buyback share count reduction is helpful because it removes flexibility. We want to retain flexibility so that when we're considering it as a Board, we can take into consideration that basket of considerations that will allow us to make the right decision for the company and the shareholders.

Murray Auchincloss, CEO

I think balance point is the key, isn't it? The thing that we feel really, really anchored to is that balance point of affordability on the dividend at. And of course, share count reduction helps drive that balance point down, but balance point is what we're obsessed about. Chris?

Christopher Kuplent, Analyst

Chris Kuplent from Bank of America had two quick questions. Murray, you mentioned in your speech about Aker BP and the value creation achieved off balance sheet with Angola. Can you contrast that with how you are bringing Lightsource under your full control? We've seen the asset swaps with Equinor, TA, and those acquisitions were fully owned and fully in control. Can you compare and explain why these situations matter to you? My second question is for Kate. I noticed the $14 billion two-year guidance is based on current market conditions. How do you feel about those conditions? While refining margins have decreased significantly, they still remain above your balance point comment, and the same goes for Brent. Could you provide some insight into how comfortable we should feel about the current market conditions?

Murray Auchincloss, CEO

Yes, I'll start and Kate can follow. Regarding Aker BP, this was an impressive transaction with unique circumstances. We were managing declining assets nearing the end of their life cycle, which made it sensible to exit the basin. The counterpart was experiencing growth but required cash generation to continue expanding, as they lacked sufficient cash flow on their own. After years of discussions, we successfully combined the two companies, creating significant value. While I don't have the latest figures, the deal was valued at around $1 billion at the time and has likely grown to about $3 billion or $4 billion now. This was a win-win situation for both parties involved. With Lightsource bp, we partnered with a private individual who has successfully scaled the business but has reached their maximum financing capabilities. Similar to Aker BP, they lacked the cash flow to grow further, making this the right moment for them to exit and for us to take over. This presents us with several advantages, as Coral has a strong trading business and demand for natural gas, along with solar and battery technologies, continues to rise, particularly from cloud providers utilizing GenAI. The demand metrics are extremely high, and being able to control this entity and offer energy trading options is crucial. Additionally, if green hydrogen gains traction, having control over the developer will be essential to prevent eroding profit margins to third-party developers. Therefore, it makes sense to integrate and optimize this operation, aligning it with Carol's and Anja's businesses, which will provide us with a competitive edge. We are open to incorporating partners for development projects and will consider our strategy regarding the developer as we proceed, remaining flexible in our approach. I hope these insights clarify our thought process in maximizing value throughout different market cycles. Kate?

Katherine Thomson, CFO

Yes. So Chris, current market conditions. So a couple of things I'd say. One is I think it's important to anchor yourself around the fact that the cash flows of our company are not driven by an oil price alone. So it's a basket of commodities, it's oil price, it's gas price, it's refining margins. You know that. And you can look at where we've been year-to-date so far to get a sense of where we're thinking on that. What I would say is that the confidence that we now have in our balance sheet to tolerate movements around that gives you a sense that we can be comfortable in the fact that we'll be able to distribute the $14 billion in a range around where those prices have been year-to-date. If we see a fundamental disconnect in the market, then, of course, we'll need to talk to the Board and update you if that happens. But for now, the confidence we have in the business performance and the momentum we've got, the confidence that we've got and the strength of our balance sheet allows us to be confident that we can deliver the $14 billion at prices around where they've been year-to-date. That's how I hold it.

Oswald Clint, Analyst

Oswald Clint from Bernstein mentioned that after adjusting for approximately $4.5 billion in trading from last year, it's impressive that they achieved the 4% target. He inquired about the confidence in maintaining that performance over the next two years, particularly considering macroeconomic factors. He also asked for insight into how the new businesses would contribute to this growth. Additionally, he referenced Murray's point about the four generations in the oil and gas sector and expressed curiosity about the potential for increased liquids growth in the portfolio, especially in light of the 3% target through 2027 and the impact of service cost inflation.

Murray Auchincloss, CEO

Yes, I can address both of those. In Denver, we communicated that we anticipate a 2% to 3% increase in our oil production through 2027. Over the next two years, we'll be making significant decisions on sanctions that will influence our growth beyond that. Key projects include Cabo Frio in Brazil, Kaskida, Tiber, Gila in the Gulf of Mexico, and the Paleogene, all of which show clear potential for expansion. Some of these projects are fully owned, like Paleogene with 9 billion barrels. Our focus will remain on returns rather than solely on volume, although we see opportunities for greater growth beyond the 2% to 3% if we choose to approve more sanctions. We have been somewhat behind on our reserve replacement ratio, but that should improve as we aim for 12% to 16% in sanctions in the coming two years, although the specific volume outcomes are hard to predict. We've stated an objective of reaching 2 million barrels a day by the end of the decade, with the sanctions playing a pivotal role in achieving that. Despite the volatility from recent global events, I'm confident in our ability to generate returns similar to those from past years. Oil demand remains strong, and spare capacity is limited outside of Saudi Arabia. In refining, there have been many shutdowns, leading to shortages in the diesel complex, and potentially in gasoline soon. Natural gas is currently stable, but winter conditions could alter that situation as well. The market is volatile, and our trading business is equipped to navigate that. We're expanding our LNG business, targeting 25 million tons by 2025 and 28 million tons by 2030, supported by contracts in Oman and Canada. Additionally, we're increasing our gas-powered capabilities and enhancing our biofuels segment through efficient, small-scale coprocessing in our refineries. I'm comfortable with our projected 4% growth moving forward, and with the ongoing investments we're making and the volatility expected, I believe we are well-positioned. Let's move on to the next question.

Lydia Rainforth, Analyst

I want to express my pleasure in seeing both of you take on your new roles at BP, and I appreciate the consistency in your guidance regarding the share buyback. Murray, you've mentioned the goal of creating a simpler, higher-value BP, which sounds promising. However, what are the obstacles that might prevent you from achieving that? What do you see as your biggest challenges over the next eight quarters? Now for Kate, you've indicated a minimum buyback of $14 billion. What could change that figure? Is it related to operational issues, or is it mainly due to price fluctuations? Additionally, how do you weigh capital expenditures against share buybacks?

Murray Auchincloss, CEO

Lydia, that might have been 3 questions, but it was actually 2.5, so that's fine. I'll let Kate address the second set regarding challenges for simplification. The easiest way to approach this is to recognize that the past 4 years have been focused on origination. We've built a vast range of opportunities in hydrogen, solar, offshore wind, and oil and gas. Now, the major challenge lies in transitioning our organization, including engineers and commercial teams, from origination to execution. We need to accelerate decision-making to reduce cycle time and enhance value, ensure that personnel are allocated effectively, and phase out outdated initiatives. A common struggle in large corporations is discontinuing old projects, which is a persistent challenge for our leadership team as we strive to ensure that our teams concentrate on key priorities rather than getting sidetracked. Simultaneously, there are significant opportunities in the tech realm. We've made substantial progress in digital transformation over the last decade, particularly in our upstream operations. We've partnered with Microsoft as one of their founding partners on AI Copilot, and we're rolling this out to our engineers and the broader company. Determining the best large-scale endeavors to pursue is a critical challenge due to the vast potential we see in this area. Therefore, moving forward, it’s all about focus—ensuring the organization focuses on the right areas while letting go of the rest. That’s our biggest challenge ahead. Kate?

Katherine Thomson, CFO

Thank you, Lydia. I'll start with the $14 billion and then address your question regarding CapEx and share buybacks. My perspective on the $14 billion aligns with what Murray mentioned about aiming for 2025 and the strong momentum we have right now. Our operations are performing exceptionally well, and we have several initiatives launching in the next two years, which boosts our confidence in our operational capabilities and the expected business outcomes. This aspect is crucial in understanding the $14 billion decision. For me, it's primarily about the current environment. Any significant changes in that environment will, of course, affect our cash flows. That's why we've based our considerations on current conditions. We chose to go with current market conditions to provide you with an objective viewpoint. Regarding CapEx and share buybacks, I want to clarify that the reduction in our CapEx guidance to 16 isn’t connected to the affordability of the $14 billion. The tightening reflects our commitment to being disciplined in capital allocation, driven by returns. Our projects must meet specific criteria; otherwise, we will not proceed with them. This approach is something Murray and I are very clear about. We've engaged in significant inorganic activities recently, but I anticipate there will be less opportunity for that in the coming years. The 16 figure seems appropriate based on our current projects and the limitations we face in the global upstream yards. I do not associate the upgrade in share buybacks with the CapEx tightening. The CapEx reduction emphasizes discipline and focus, while the share buyback initiative stems from our confidence in our balance sheet and the underlying performance of our business, which is what enables us to enhance these plans.

Murray Auchincloss, CEO

Yes, and then on simplification, I think what I'd say is there are lots of opportunities. A new team we can reflect on and think about how we can work together more effectively. We can simplify our narrative, which you started seeing us do today. We can simplify overlap inside organizational structures that we've talked about today. We can simplify buyback guidance, which you've seen today. And there's a long list of these things that the leadership team and I are thinking about. And our challenge is how do we just gradually do these things over time, driving efficiency into the business at the same time that we keep superstructure strong and keep the drive and focus on the strategy is strong. So that's really what I'd say. But the efficiency drive, we'll be able to do an awful lot more with digital, now that we've got GenAI inside. We'll do an awful lot more as we progress the digitization of the downstream business. We have offshore centers to build up now. That will drive an awful lot of efficiency into the business as well. So I think we're enthusiastic, and we see a lot of opportunity in this space about simplicity, focus, and then a hard focus on returns. Thanks for your question, Matt. And the last question goes to Menno.

Menno Hulshof, Analyst

Thank you for taking my question. I understand it's been a lengthy call. I would like to ask about the Paleogene as a key driver of liquids growth projected through 2030. Can you provide an update on the status of Tiber and Kaskida? What are the main risks associated with achieving initial volumes by 2028? My second question is for Kate regarding divestments, which did not fully meet the 2023 guidance. Should we interpret this as a timing issue? Additionally, how important is it to close the next $2 billion to $3 billion of asset sales, considering your confidence in the balance sheet?

Katherine Thomson, CFO

Yes, a few things on divestments. Yes, we were slightly short of our guidance that we put out at the end of the third quarter. I think you wouldn't be surprised to hear me say that, as Murray has talked about a lot. We are hugely focused on value. And if I get the sense of a transaction isn't delivering value because I'm trying to hit a certain deadline to close it, I'm not going to do that. So there's 1 or 2 that we have allowed to move into 2024. We're just going through the process again to make sure that we're getting maximum return for those assets. And that is what I'm going to be focused on delivering with regard to the divestment target. Broadly, at the moment, I would say we're on track for the 25 by '25. Let's see how it goes. I'm confident in the 2 to 3 that we've said we're guiding for 2024. But as I say, I'm much more driven by getting value for the transactions we're executing. I'm not going to be solely driven by hitting a number and a target if that doesn't make sense, and we're not getting the returns that we need, so that's how we're going to be looking at it, and that's what we're going to be focused on.

Murray Auchincloss, CEO

What a great way to wrap up the discussion on a Paleogene topic. We have 9 billion barrels of oil in place, a substantial resource identified across Kaskida, Tiber, Gila, along with new exploration opportunities from recent acreage acquisitions. It's time for BP to revisit this basin after being absent for 15 years, and we are genuinely enthusiastic about it. Our teams are currently working on Kaskida and Tiber. We aim to reach the Final Investment Decision (FID) for Kaskida this year, depending on how things progress. The main challenge we foresee in our timeline will be securing yard space, as we are currently assessing yards to determine available slots for construction. The subsurface appears secure now, backed by sufficient production analogs from similar fields, which suggests there is more upside than risk. Development costs and economics are looking favorable, so it will primarily hinge on timing, and we'll keep you updated as the year unfolds. Tiber will follow Kaskida, and we will approach these projects sequentially. I encourage the team to prioritize safety and efficiency in cycle time, as that maximizes value for the company. Thank you all for participating today, both in person and online; your attendance is greatly appreciated. To conclude, our goal remains consistent: to transition from International Oil Company (IOC) to International Energy Company (IEC) while being simpler, more focused, more efficient, and dedicated to creating value. Thank you for your time, and I look forward to seeing you in the future. Goodbye.