BP profits halve but dividend is maintained

2nd February 2016


BP has held its dividend despite its profits halving, prompting commentators to question whether the payments to investors are sustainable.

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.

The company 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 it 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

Steve Clayton, head of equities research, Hargreaves Lansdown, says: “BP hasn’t blinked on its dividend, but it is playing chicken with the oil price. BP’s dividend is a mile away from being covered by earnings and the market is saying that this is unsustainable. They are a chasm away from their cash break-even oil price of around $60 dollars per barrel.”

Helal Miah, investment research analyst at The Share Centre, adds: “BP’s full year results reported this morning did not provide too much of a surprise in terms of the punishment they took as a result of lower oil prices. Underlying profits dropped to $5.9bn, less than half of last year’s profits of over $12bn, and reaction in the market at the open saw 6% fall in the share price.

“There was a pre-tax charge of $12bn in relation to the Gulf of Mexico oil spill, along with further impairment charges and restructuring costs. As expected, the upstream oil and gas production operations generated a loss of $937m in comparison to a profit of $8.9bn in 2014 and its 20% ownership of Rosneft generated profits of $1.3bn compared to $2.1bn the previous year.

“Investors should acknowledge that at times of lower oil prices, the downstream divisions generally do better. This has helped mitigate the losses from the upstream operations with profits jumping to $7.1bn from $3.7bn.

“One of the key topics of discussion is whether the oil giants can continue to pay their dividends. Interested investors should appreciate that BP has decided to maintain its dividend policy and will pay a 10c dividend in March.

“These numbers should not come as too much of a surprise to investors who will have been prepared to ride the storm knowing that oil prices have plunged by 70% since summer 2014. This stock remains a contrarian play on the oil price for investors seeking a balanced return and willing to accept a medium to higher level of risk.”

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