Summary of Capital allocation briefing

00:00:00 - 00:55:00

The video discusses the capital allocation process at British Petroleum, explaining how it is based on three key factors--commodities, economic rents, and growth potential. It goes on to discuss how cyclicality can impact capital allocation decisions, and how successful capital allocation strategies require a sound strategic framework.

• 00:00:00 This video provides a briefing on the capital allocation process at British Petroleum (BP). The framework used is based on three key factors--commodities, economic rents, and growth potential. The presentation goes on to discuss how cyclicality can impact capital allocation decisions, and how successful capital allocation strategies require a sound strategic framework. The video concludes with remarks on the importance of good capital allocation processes, and how trust can be damaged by poor investment decisions.
• 00:05:00 The video reviews the capital allocation framework, which includes a prioritization of maintaining safe and reliable operations, testing internal metrics to confirm the balance sheet is strong, and paying a minimum dividend of 50 percent of earnings in cash. If the surplus capital exceeds shareholder returns through dividend or buyback, further shareholder returns are possible through dividend or buyback.
• 00:10:00 The company's capital allocation process begins with fundamental long-term market and scenario analysis, followed by assessment of existing portfolio resilience and creation of options for the future. Investment evaluation is conducted using standardized evaluation techniques, with prioritization of assets based on their ability to generate returns in excess of minimum dividend and maintain optionality. Marketing develops factors contributing to procyclicality in assumptions and tests projects for resilience against a range of metrics. Investment decisions are not made without consideration of risk and return, and hedging is employed to manage volatility.
• 00:15:00 The three types of capital allocation options are easy to identify, but the second and third options are more difficult to identify. The top-left quadrant, with high return and high optionality, is easier to invest in, but the top-right quadrant, with high return and high risk, is more difficult to invest in. The bottom-left quadrant, with high return and high risk, is more difficult to invest in because it requires large upfront investment. The bottom-right quadrant, with high return and high optionality, is more difficult to invest in because it requires large capital efficiency.
• 00:20:00 The video discusses the Capital Allocation Framework, which has been used to rebalance the use of capital since its inception. The framework has helped improve capital efficiency and added high-risk, high-return projects to the portfolio. The video also discusses how the framework has helped return shareholder capital.
• 00:25:00 Hayden Bairstow from McCrory Asset Management discusses their view on capital allocation, stating that they have a good range of options available to them in case the market needs them. They caution, however, about the possibility of having too many projects running at once, risking capital blowouts and project delays. Bairstow also speaks about the importance of taking the value of embedded optionality into account when making decisions.
• 00:30:00 The video discusses how Capital allocation is made, and how different factors are weighed in order to come to a decision. It also mentions how Probabilistic Analysis is used to calculate IRR, NPV, and other efficiency ratios. Finally, it touches on how a project's risk and return is measured, and how it competes against other projects.
• 00:35:00 The presenter discusses capital allocation, highlighting that portfolios are inherently lower risk than individual projects and that assumptions, methodologies, and judgments must all be realistic in order to improve forecasting accuracy. The presenter also discusses the importance of balance in capital allocation and how difficult it is to achieve. Finally, the presenter discusses the capital allocation process and how the board should not approve additional funding until the portfolio's existing assumptions and methods are improved.
• 00:40:00 The presenter discusses the importance of price in capital allocation and how it can be critical in determining the success or failure of a project. He also discusses how M&A can affect a company's value and how the capital allocation process is the same for all investments. The presenter also points out that prices can change over time, and that past investments can have an impact on current ones.
• 00:45:00 The video discusses cyclicality and the importance of capital allocation. It explains how low-cost, long-life assets can be resilient to cycles, and how maximizing value through capital allocation can be key to success. The video also discusses how Jensen Mining's capital allocation may be a hindrance to its success, citing its high volatility and the need to pay for that volatility.
• 00:50:00 The presenter provides a brief overview of the capital allocation framework and how it can be used to make decisions about which investments to make. He also talks about the recent strike at Escondido and how it set up a good outcome for the company.
• 00:55:00 The video discusses capital allocation, and explains that when making decisions about investment, the organization takes into account things like the potential for legal action and the impact on the company's reputation. It also mentions that the buyback currently underway is risk-adjusted and will stop once the value of the stock falls below a certain threshold. The speaker finishes by saying that the organization is a growth investor and that it is important to remember this when viewing its past decisions.