BP - Less uncertainty and a 5.9% yield

BP (BP..L): I have been very worried in the past about BP’s dividend security as they wrestled with their open-ended Deepwater Horizon bills, Russian exposure and soggy crude oil price. Last Friday, shareholders had some good news in the shape of a wide-ranging settlement of the Deepwater debacle. The agreement with the US Federal government and the five affected states totals a whopping $18.7bn, but this is less than most people’s worst fears and is spread over up to 18 years. This all means that the pre-tax charge relating to the spill will climb from $33.8bn to $43.8bn. This is some £28bn at current exchange rates and (ignoring any discounting back to make it look smaller) is still a huge financial (and reputational) blow against the scale of a company whose current market capitalization is around £79bn. A small consolation for BP is that some of the cost will be tax deductible, whilst they were braced for this, with the first quarter balance sheet showing cash of $32.4bn, with net debt of $25.1bn, resulting in a modest gearing ratio of 18.4%. Immediately, the board has made it quite clear that their commitment to the dividend is unaffected by this settlement and that their support of it remains absolute. The sting in the tail of the settlement news is that the myriad of smaller individual claims and class actions will continue and a bugbear for BP has been the generous nature of the settlements awarded by the US courts. Whilst some of the legal profession may now have to climb off the gravy train, many others will still be happily on board.

So, the Deepwater saga is more of less into the final furlong, but BP remains in a difficult place. The low oil price and anaemic global recovery (with Chinese GDP growth fading rapidly), is making the day-to-day business of the oil majors tougher. BP also has that exposure to Russia through Rosneft. The good news here is that a weird sort of equilibrium has been reached. Yes, sanctions against Russia interests are in place, but I do not perceive that much is being done to tighten the screw as companies find work arounds. Unless Putin raises the heat again, we seem to be in for a long drawn out staring match, with the West wary of baiting the Russian bear too much.

BP is still not a stock to get excited about, but having been wary at 450p in February, I have to be more upbeat at 432p with much uncertainty removed. Dividend growth may still be low (or absent) but the current annual 40c (25.64p) seems safe. That equates to a yield of 5.9%. Furthermore, takeover chatter is re-emerging. It is seen that, with oil prices so low, corporate activity can lead to financially engineered growth. BP at low valuations and with Deepwater settled, it seems to have a target plastered to its rump. That doesn’t mean that anyone will take a pot-shot, but it must be an uneasy feeling all the same. (Neil Cumming^, 6^th July 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower