Could British Petroleum Cut Its Dividend?
BP plc (ADR) (NYSE:BP), also known as British Petroleum, has seen deep red for both BP stock’s fourth-quarter and annual 2015 results. BP announced that its dividend would remain at $0.10 per common share, payable in March. But BP stock experienced a perpendicular drop on the chart in a free-fall chute from $31.70 to $28.86. BP’s performance reflects heavy write-downs and the effects of collapsing oil prices over the past 20 months. Yet BP has also taken steps to ensure its dividend will not suffer.
There was concern that BP’s cash flow would no longer cover expenses and dividend payments, while its debt grows by the hour. Standard & Poor’s cut Royal Dutch Shell plc’s rating, stripping the stock of its investment-grade status. This suggests BP could be next.
BP’s CEO, Bob Dudley, had soothing words for owners of BP stock. He assured investors that BP would continue to issue a dividend, offering an eight-percent yield. This is despite the fact that the stock dropped nine percent in a single session. (Source: “BP’s dividend is less of a worry than the damage from cuts and job losses,” The Guardian, February 2, 2016.)
BP will be able to sustain its dividend cost better than jobs, which cost $24.0 billion. Hence, the dividend stays and 7,000 jobs go out the BP door. By comparison, dividends cost some $6.6 billion, which BP could afford by increased borrowing if needed. (Source: Ibid.)
In the last three months of 2014, Brent crude cost an average of $44.00 a barrel, more than 40% less than in the same period of 2013. But last January, oil prices fell below $30.00 in response to lower demand, especially from China. Plus, sustained volume production by countries linked to OPEC (the Organization of the Petroleum Exporting Countries) and Russia has put even more pressure on oil prices.
As BP’s stock price has collapsed, it has not lost its charm. BP has assured investors that the dividend remains a priority. The company will cut investments, even as it continues to pursue important projects, including ones in China. Like BP, other major oil companies are cutting billions in investments, which will reduce supply. Meanwhile, record vehicle sales in key markets from North America to China and even Europe suggest demand will grow as early as this year. This combination of factors will push oil prices higher by 2017.
While BP’s results are dismal, BP stock had already absorbed much of the pain before the results were published.
BP has also announced measures to confront the oil market situation. It will cut another 3,000 marketing and refining jobs by the end of 2017 on top of the 4,000 jobs it planned to slash in exploration and production.
BP’s cost reductions to the tune of $3.4 billion in 2015 and a further $7.0 billion this year and next make BP an interesting stock to consider. Indeed, these efforts suggest BP has not lost sight of its dividend. BP has ensured cash flow to shareholders for the long-term, according to BP CEO Bob Dudley.
BP reported fourth-quarter recurring net loss (after deduction of so-called replacement costs) of $2.2 billion. That is more than twice as much as the $969 million reported a year ago—more than 90%. As for full-year 2015, BP suffered a net loss of $6.5 billion, compared to a profit of $3.78 billion in fiscal 2014. By comparison, these results are worse than in 2010. Then, BP had to confront $55.0 billion in legal and operational costs for its Gulf of Mexico oil spill. (Source: “Oil giant BP to slash 7,000 more jobs as it reels under the worst loss in over 20 years,” Financial Post, February 2, 2016.)
Holders of BP stock can feel assured that even if the company has to borrow, it will be issuing a dividend as promised.