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BP - Profits halved, dividend held

Steve Clayton | 2 February 2016 | A A A
BP - Profits halved, dividend held

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BP Plc Ordinary US$0.25

Sell: 507.20 | Buy: 507.40 | Change 2.60 (0.51%)
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BP today announced underlying 2015 replacement cost profits of $5.9bn, compared to $12.1bn the year before. In Q4, BP saw profits fall to $196m from $2.2bn in the prior year. The company has declared an unchanged, but uncovered, dividend of US10c for the quarter. This will be paid in sterling to investors in March, based on the exchange rates prevailing at that time.

Cash flow for the fourth quarter was $5.9bn, taking the full year total to $20.3bn, a fall of 38% from the year before. BP attribute the fall in profit to the effect of low oil prices, more than outweighing the benefits of cost reductions being enacted throughout the business.

BP announced the completion of its $10bn disposal programme and set out plans to raise a further $3bn-$5bn in the current year. Capital expenditure was $18.7bn for the year and BP expects to invest an underlying $17bn-$19bn this year and next. Annual cash operating costs were $3.4bn lower than in 2014 and BP expects to have achieved a reduction of close to $7bn p.a. by 2017.

BP had previously suggested that the company would be cash neutral, before acquisitions and divestments, at an oil price of around $60 per barrel. Prices were well below this in Q4 and have drifted lower since. BP now expect the actions they are taking will have lowered the cash "breakeven" point to somewhat below $60. Gearing was 21.6% at year end and BP expect to manage gearing around the 20% level going forward.

A further charge of $443m was taken in Q4 relating to the 2010 Gulf of Mexico oil spill, taking the cumulative pre-tax charge for the incident to $55.5bn.

BP shares opened 6% lower despite maintaining the dividend.

Our view:

The market is calling BP's bluff on the dividend. The company says that its cash breakeven oil price, the point where sources and uses of cash are in balance, is a little below $60 per barrel. But the current oil price is closer to $30 and BP is losing money in its upstream business.

With gearing hovering around the 20% level, BP can pay the dividend if it really wants to, but it will become an increasingly tight constraint on the business. The dividend costs circa $7.3bn per annum, but the business only generated $20bn of cash in 2015, when oil prices were far higher than today, and BP needs to spend around $17bn a year on capital expenditure. So all things being equal, maintaining the dividend requires BP to either greatly increase disposals, or to rack up debt, in order to fund the payout.

How long that can go on for is the question. It looks like BP is betting on a rapid return to significantly higher oil prices. If they duly appear, then BP will have protected its shareholders through the tough times. But if oil does not rebound, then BP will become progressively weaker in an environment where strength matters.

If prices do recover, BP's lower cost base will serve it very well, and profits ought to recover rapidly, but for now, cost cutting is simply serving to limit the damage.

At the current price of around 345p, BP's historic yield is circa 8%. Listen to the company and the prospective yield is about 8% too. But as the old market adage says "nothing yields eight". The simple truth of the matter is that if BP halved the dividend, the shares might yield 4%, the company would free up several billion a year of cash flow and if the oil price went onto recover, there would be plenty of scope to grow the dividend.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.