ii view: BP strengthens finances to save the dividend

In a pandemic of Covid-19 dividend suspensions, could BP and oil be next?

Covid-19 update

• Reducing capital expenditure by 25% to $12 billion
• Cost savings of $2.5 billion by end of 2021
• On track to complete $15 billion of business sales by mid-2021
• Around $32 billion of cash & undrawn facilities available 

Chief executive Bernard Looney said:

“At BP we are mobilising in our own way across the BP world, taking action with three clear objectives: protecting our people; supporting the communities where we live and work; and strengthening our finances.

"At the same time, we are in action to protect the financial health of BP. This may be the most brutal environment for oil and gas businesses in decades, but I am confident that we will come through it - we know what to do and we have done so before. And we also entered this environment in great shape with good operating momentum and financial discipline, strong liquidity and extensive optionality in our portfolio. We remain committed to growing sustainable free cash flow and distributions to our shareholders over the long term."

ii round-up:

Amidst the corona crisis and ahead of its end-of-April first-quarter results, BP's (LSE:BP.) new chief executive today outlined measures to help strengthen the oil major's finances.

Group expenditure is being cut to $12 billion from a previously planned $15 billion, with output from its US shale business reduced as it battles a 60%-plus drop in the oil price year-to-date.

Cost savings of $2.5 billion come the end of 2021 are in management’s sights, while its programme to execute $15 billion of business disposals by mid-2021 remains on track, subject to current volatile market conditions. 

No mention of the dividend payment was made, although the oil mammoth noted its commitment to "growing sustainable free cashflow and distributions to shareholders over the long term". 

Against a backdrop of further falls for global stock markets, BP shares fell by just over 2% in UK morning trade, adding to a near 30% fall over 2020. Rival Royal Dutch Shell (LSE:RDSB) shares are down nearly 40% year-to-date.

In an effort to reduce stress and worry, and despite cost cutting action, no BP employees will be laid off over the next three months as a result of virus-related cost cutting. Non-essential project work is also being reduced in order to lower staffing levels and lower possible virus spread.

First-quarter downstream performance is expected to suffer as a result of a significant fall in demand for jet fuel. The company has around $32 billion of cash and undrawn facilities available.  

ii view:

Oil giant BP operates in over 75 countries. It employs over 70,000 staff, with around 1.7 million barrels of oil passing through its refineries daily. It operates over 18,500 retail sites globally. 

BP has already been navigating a multitude of difficulties and opportunities. The disastrous 2010 Gulf of Mexico oil spillage has cost it billions, while the previous acquisition of assets from miner BHP Group (LSE:BHP) has seen group debt rise. A fallout between oil producing majors Saudi Arabia and Russia, along with a global Covid-19 pandemic now adds further sizeable hurdles for it to negotiate.

For investors, BP and its dividend paying ability remain a key ingredient within an income generating portfolio. A historical dividend yield in the region of 10% is now raising questions over whether the payment will be cut. Measures announced today will help, while a reiteration of its long-term commitment to growing shareholder returns offers some reassurance. However, a dividend cut of some sort always remains a possibility. 

Positives: 

• A reduction in debt is being targeted
• Gulf spill payments expected to fall below $1 billion in 2020 (2019: $2.4 billion)
• Set a new ambition to become a net zero carbon company by 2050

Negatives:

• Net debt rose 4.4% year-over-year to £45.4 billion as of its Q4 results
• Full-year 2020 production expected to decline
• Association with climate change

The average rating of stock market analysts:

Buy