BP: dollar-declared dividends

BP (BP.) is nominally British. Its headquarters are in London, it is once again investing in the North Sea, and the word ‘British’ even used to be in its name (the last US President seems to think it still is). But as befits an oil and gas supermajor, the group is also a citizen of nowhere and everywhere. Alongside operations in 72 countries and an American chief executive, the group does most of its business in dollars. That includes its quarterly dividend, which is declared in dollars before conversion into sterling.

The latter point is, of course, true of rival Shell, and most of the major resources stocks listed in London. Hard commodities are bought, sold, accounted and profited from in dollars. And for UK-based income seekers, this might be BP’s chief attraction in the years to come. Because while there are questions over the greenback’s status as the world’s reserve currency, the economic uncertainties thrown up by Brexit arguably pose bigger questions to sterling’s trajectory.

Put simply, a dollar earner (and payer) such as BP should act as an insurance policy against further falls in the pound. Of course, that’s a statement in need of a caveat or two. First is BP’s historic volatility as a stock, which in recent years has repeatedly tested the dividend cover to breaking point. A second, related point is the stock’s intimate link to oil and gas prices, which tend to gyrate, collapse and spike rather than flatline. Third, gradually waning sentiment towards the fossil fuel industry – a view born of economic and ecological necessity – will continue to cast a long shadow over the sector’s valuations.

Then again, even if the market attaches a lower price to BP’s cash flows, the shares can still outperform on a total return basis. And on a three-year operational and financial view, income-focused investors probably have fewer reasons for concern than at any point since the Deepwater Horizon oil spill. For one, remediation payments for the disaster– which sucked up $5.2bn (£3.9bn) in 2017 – are finally starting to unwind, almost a decade on. Meanwhile, production is growing and BP’s annual capital expenditure is not expected to exceed $17bn before 2021.

The leading indicator for a bullish income outlook has been the promise of share buybacks, rather than an uplift in the dividend. Last year, BP got out in front of Shell when it retired $343m-worth of shares, and investors have been told to expect more to come. As we have previously argued, this commitment would make more sense if BP had first scrapped the scrip portion of its dividend, but most analysts expect this contradiction to unwind by 2019.

Supporting this is an improving cost profile. Chief executive Bob Dudley wants the group to generate free cash flows even if Brent crude falls to $35 a barrel, although analysts at HSBC think the $45-$50 range is more realistic by the end of the decade, including ongoing Deepwater payments. Naturally, the gloss on these margins should be seen in the context of $40bn of net debt at the end of the first quarter of 2018 – equivalent to 39 per cent of total equity.