ii view: income seekers cheer BP dividend

With all manner of problems facing both BP and the oil industry, is the dividend decision sensible? 

First-quarter results to 31 March 2020

• Underlying replacement cost profit down 67% to $800 million (£640 million)
• Net debt up 13% to $51 billion (£41 billion)
• Dividend payment up 2.5% from Q1 2019 to 10.5 US cents per share 

Chief executive Bernard Looney said:

“This extraordinary time for the world demands extraordinary responses. And thankfully we are seeing that just about everywhere we look around the world. Our industry has been hit by supply and demand shocks on a scale never seen before, but that is no excuse to turn inward. BP, like many other companies, is stepping up and extending a helping hand to those in need.

“At the same time, we are taking decisive actions to strengthen our finances - reinforcing liquidity, rapidly reducing spending and costs, driving our cash balance point lower.

“We are determined to perform with purpose and remain committed to delivering our net zero ambition.”

ii round-up:

Oil giant BP (LSE:BP.) operates in over 75 countries across the world. 

It employs over 70,000 staff, with around 1.7 million barrels of oil passing through its refineries daily. 

BP runs over 18,500 retail forecourt sites globally. 

For a round-up of these first-quarter results, please click here.

ii view:

BP has already been navigating a multitude of difficulties and opportunities. A further $1.2 billion is soon to be paid in relation to the disastrous 2010 Gulf of Mexico oil spillage, while the previous acquisition of assets from miner BHP (LSE:BHP) helped fuel an earlier rise in net debt. 

In 2020, a supply disagreement between oil producing majors Saudi Arabia and Russia, combined with a slump in demand due to lockdowns under Covid-19, have seen the price for crude fall by around 70% year-to-date. 

For investors, BP is taking action to address the stark backdrop. Cost cuts, business disposals and reductions in capital expenditure are all being pursued. The importance of the dividend payment has also clearly not been forgotten. A continuation and even small increase will be a big relief for income investors. But is this sensible? Group net debt has climbed, and even resetting its breakeven cost to $35 per barrel by next year still leaves it above the current oil price. While income seekers will love this rare windfall, a degree of caution is warranted given these unusual circumstances.

Positives: 

• Attractive dividend payment (not guaranteed)
• Cash conserving actions being taken
• Set a new ambition to become a net zero carbon company by 2050

Negatives:

• Net debt up 13% to £51 billion
• Second-quarter upstream production expected to fall
• Fossil fuels are linked with climate change

The average rating of stock market analysts:

Buy