Policy: “To grow sustainable free cash flow and distributions to shareholders”
Yield: 6.95 per cent
Payment: Quarterly, declared in dollars, paid in sterling
Last cut: 2010 (cancelled and discontinued after Deepwater Horizon spill)
On average, the analysts who cover BP (BP.) expect a lot of the integrated oil giant over the next three years. According to Bloomberg consensus forecasts, revenues will rise by 30 per cent in 2017 to $238bn (£184bn) and to $272bn by 2019, while pre-tax profits are set to almost triple this year to $10.3bn, before growing at an average of 25.6 per cent in both 2018 and 2019. By that point, net debt will start to fall and projected dividends imply a forward yield in line with the existing 7 per cent rate.
Nothing to worry about then? Well, yes, if anyone in the market could predict next year’s average oil and gas prices with any degree of certainty. But even if you accept market assumptions that global demand will slowly creep up on supply and shift prices higher, there are numerous reasons to question the security of BP’s shareholder returns.
Like everyone in the industry, BP has spent the past three years adapting to the long-term prospects of $60 or even $50 a barrel of oil, slowly turning around its tanker of a company in the process. Unfortunately, BP had spent the previous four years turning itself around after the Deepwater Horizon disaster in 2010. The incident, which wiped out about a third of BP’s value, also landed the company with a $62bn bill (less a large chunk of deductible tax) and pushed dividends down the cash flow pecking order.
BP forecast cash flow to 2019
Quarterly distributions were swiftly reinstated in 2011, but remain cramped by BP’s outgoings. After $4.9bn of Deepwater Horizon costs and working capital movements, analysts at HSBC expect the oil major to generate $15.9bn of organic cash flow this year. With capital expenditure maintained at a lofty $16.6bn, the $5.3bn required to pay the cash dividend will need to be almost entirely paid for by divestments. The wriggle room is minimal. Once shareholder returns are paid out, BP will have just $305m in organic free cash flow left.
This slim cover begins to look even more fragile from 2019, when management has signalled it will abandon the scrip dividend that makes up around a third of the distribution. That assumes crude stabilises at around $60 a barrel, which is the price BP currently needs to generate free cash flow. Compared to the oil company’s peer group, this is high. In fact, analysts at Macquarie think that BP needs at least $64 oil, and more disposals, to afford its dividend without dipping further into borrowings this year.
On the flipside, BP has a series of upstream projects due to start generating cash later this year, including 160,000 barrels of oil a day from the Abu Dhabi ADCO concession. Investing at the bottom of the cycle is rarely a bad thing, although most analysts reckon that BP won’t start to generate free cash flow at $40 a barrel – a level we would suggest is desirable for the dividends’ long-term security – until towards the end of the decade.
