After several years of investment and earnings growth BP’s (BP.) upcoming cash returns to investors require two things: stable or rising oil and gas prices, and asset sales. Beyond this year, the winding-down of the Deepwater Horizon compensation payments (from $2bn in 2019 to around $1bn a year from 2020) and higher gas production could also see heftier dividends. Further out, things get murkier.
A recent Berenberg report suggests BP’s go-slow decision on non-fossil fuel asset investment could avoid wasting cash in the short and medium term, but also doom future returns for investors. “Moving too quickly risks the misallocation of capital into technology and assets which can subsequently be rendered obsolete, and... can drive returns lower, destroying shareholder value,” the analyst house argues. “Conversely, however, moving too slowly could ultimately pose a threat to the growth and long-term survival of the company as the global economy increasingly looks to low-carbon substitutes in the energy mix.”
That obviously has implications for the long-term income case, although Biraj Borkhataria of RBC has written two helpful pieces this year that shed light on how BP will afford to keep handing cash back in the near term. The first outlines the major’s commitment to gas production in the early 2020s. “BP’s [oil] production should also grow materially [to 2022] and as a result we expect liquids reserve life to remain roughly flat at [around] 13 years,” he says. “In contrast, we see gas reserve life increasing from 15 years... but then declining to 11 years in 2022 as gas production ramps up materially.” For global gas prices to rise above their currently-suppressed levels, BP will hope that the 10 per cent demand growth expected by the International Energy Agency over the next five years isn’t matched by competing suppliers.
Assuming prices remain relatively stable, this push into gas should coincide with a rise in the cash-flow yield to 10-11 per cent in 2020-21, which Mr Borkhataria thinks should leave the dividend “well covered”.
While the company has improved its cash flow by cutting costs, there are still remnants of the fix-up job on the books. In April, chief financial officer Brian Gilvary did his best to explain the scrip-buyback formula, pointing to “a significant buyback programme for the second half” of 2019 that should offset scrip issuance since 2017. The buyback is “somewhere just north of $1.5bn now... [with] $1.7bn of scrip to still repurchase”, he said, although this is far less than would have been needed if the company had stuck with the even split of cash and equity financing initially planned in last year’s $10.5bn BHP acquisition. A higher oil price allowed BP to turn that into an all-cash acquisition, thereby preventing one source of dilution.
On the same call, Mr Gilvary said leveragewould stay at around 30 per cent for the timebeing, as the year’s disposals target of $4bn-$5bn should largely come through in the second half. Major deals are yet to be announced, save for the agreed sale of its Egyptian oil concessions to Dragon Energy, in a deal Reuters had previously estimated to be worth $600m.
