BP - how costly is that big dividend?

BP (BP..L): Today’s third quarter results are heavy on financial strategy. They are set out using a medium term $60 per barrel oil price, which would have seemed very conservative a few years ago. With Brent below $50 right now, a degree of optimism is required, but many believe that with new exploration choked off the oil price will have to bounce off these levels next year. The big picture is to balance cash flows by 2017, before turning cash positive. This will enable them to maintain the dividend, before resuming long-term growth. A replacement cost net quarterly profit of $1.8bn was down on last year’s third quarter of $3.0bn, but up on this year’s second quarter of $1.3bn, helped by cost cutting, a good QoQ upstream recovery and downstream resilience. Of the nine-month cumulative total of $5.7bn, $1.1bn came from their interest in Rosneft. One big hit is to capex, which a year ago was expected to be $24bn-$26bn in 2015, but is now likely to be around $19bn, with a range of $17bn-$19bn p.a. out to 2017 now provided as guidance. This is impressive, but it is difficult to tell whether they are cutting fat, gristle or meat from their programmes. The risk is that if they over-do the cuts, it will hurt future performance. Other general costs are expected to be down by $6bn between 2014 and 2017. They are on course to reach their divestment target of $10bn with more to come. Some is being ear-marked for the costs of Macondo (total so far $55bn), which are contained but still increasing despite the proposed settlements with the US authorities. Gearing is 20% having been 15% a year ago, with the net debt figure up from $22.4bn to $25.6bn. So, the gearing target having been held to a 10%-20% band since 2010, is now being loosened to “around…20%”. The quarterly dividend has been held at 10c.

So the end is coming in to focus for the Macondo bill, but as that uncertainty fades I still fret about Rosneft. It just strikes me that this investment is vulnerable to Putin moving the goal posts. Unlikely, but I just can’t be sure. Naturally, the oil price is outside BP’s control, but at these levels the resultant belt-tightening may or may not represent a future opportunity cost. Net debt crept up by $3.2bn last year, whilst the dividend cost is of the order of $7bn (£4.55bn). I just wonder whether some investors would rather protect the balance sheet strength and the ability to maximize the profit from any oil price recovery, rather than scoop a chunky yield of over 6½%. Eps forecasts for this year are 22p rising to 23.5p next year, so at 387p the PE is 17.6x dropping to 16.5x. The likely 40c dividend for this year is about 25.8p for that yield of 6.7%. The group has been adamant that the dividend will be maintained, so all my fretting may only result in hair loss and not financial loss. It may just be a case of whether protecting the dividend is at the cost of future expected total returns. Rather than choosing BP it may well be that, if you do want to hug a huge oil dividend, then the near 7% from Royal Dutch, with BG synergies hopefully in the pipeline, may be the safer option. We get more news on that stock later this week. (Neil Cumming^, 27^th October 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