BP PLC (BP) announced a 50% cut to the dividend this past week driven by the largest quarterly loss the company has ever reported. It was BP’s first dividend cut in a decade. The main problem for BP and the oil majors is very low oil prices during Q2 2020. Royal Dutch Shell (RDS.A and RDS.B) cut its dividend in the first quarter so the dividend cut by BP was probably not a surprise to many investors.
Despite the dividend cut the stock price gained. This was probably because BP beat expectations and had good revenue from trading. BP is a major player in global oil trading and oil price volatility probably helped in this regard. Further, the cut was not as severe as Shell’s cut. In any case, the dividend cut was needed as the payout ratio was high and total debt is currently elevated. The new dividend is more sustainable than the old one. The forward yield on the ADR is now about 5.4%, which is still decent for those seeking income.
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Overview of BP
BP is one of the largest oil and gas companies in the world. The company was founded in 1889.The stocks trades on the LSE and as an American Depository Receipt or ADR on the NYSE. BP has three operating segments: Upstream, Downstream, and Rosneft. The Upstream segment conducts exploration and production of oil and natural gas. This segment also owns pipelines and has a major operation in global energy trading. The Downstream segment operates refineries and sells oil and natural gas products to distributors, wholesalers, retailers, and through its own retail sites. Major brands include Castrol, BP, and Aral. BP owns 19.75% of Rosneft, which is a Russian oil company. This segment also owns and operates 13 refineries in Russia; and approximately 3,000 retail service stations in Russia and internationally.
In 2019, BP produced 2.3 million barrels of oil and 9.5 billion cubic feet of natural gas per day. The company has proven reserves of about 19.34 billion barrels of oil equivalent or bpoe at end of 2019. BP operates many refineries that process 1.7 million barrels of oil per day at end of 2019. Total revenue in 2019 was $276,850 million. BP recently announced a major strategy change focusing more on renewables.
BP Cut the Dividend
The firm announced a 50% cut to the dividend when it reported Q2 2020 earnings. The dividend cut was probably inevitable. BP reported a $17.7 billion loss in the quarter, its worst ever. Most of the loss was due to write-downs and impairments. It was BP’s first dividend cut in a decade. For the ADR, which trades on the NYSE, the regular quarterly cash dividend is now ~$0.315 per share. This makes the forward dividend yield about 5.4% at the current stock price. The annual yield was over 9% before the dividend cut. The dividend is likely more sustainable at the new rate. The cut will save BP close to $4 billion annually. The company paid about $4.2 billion in dividend in the first half the year. The new dividend will be paid on September 25, 2020.
Specifically, the company announced:
BP today announced an interim dividend of 5.25 cents per ordinary share which is expected to be paid on 25 September 2020 to ordinary shareholders and American Depositary Share (ADS) holders on the register on 14 August 2020. The corresponding amount in sterling is due to be announced on 14 September 2020, calculated based on the average of the market exchange rates for the four dealing days commencing on 8 September 2020. Holders of ADSs are expected to receive $0.315 per ADS (less applicable fees). The board has decided not to offer a scrip dividend alternative in respect of the second quarter 2020 dividend. Ordinary shareholders and ADS holders (subject to certain exceptions) will be able to participate in a dividend reinvestment programme.
From the Q2 2020 earnings call transcript, the CEO, Bernard Looney stated:
The policy combines two things, a reset and a resilient dividend intended to remain fixed at $5.25 per ordinary share per quarter subject to the board’s discretion, and a commitment to return at least 60% of surplus cash to shareholders through share buybacks once our net debt target has been reached and subject to maintaining a strong investment grade credit rating.
The main point here is that the dividend for the ADR will be cut in half. The second point is that dividends cannot be taken in shares or scrip. The third point is that the dividend will be constant at least until balance sheet is improved and BP has a higher investment grade credit rating. BP’s target is de-leverage to net debt of $35 billion. At end of Q2 2020, net debt was roughly $41 billion. Note that the company seems to be focused on share buybacks in the future rather than raising the dividend.
Impact of COVID-19 and Low Oil Prices on BP
The main challenge for BP as well as the other oil majors is that oil prices were down to historic lows. Oil prices were even negative for a short period of time. Granted, oil prices have recovered since the lows but the price per barrel is still below the cost for most oil majors. This is due to reduced demand caused by COVID-19 and too much oil on the market and in storage.
Demand likely dropped rapidly due to the global impact of the coronavirus. Most airlines are flying at a lower capacity due to severely reduced demand. Cruise lines have suspended operations. ‘Social distancing’ restrictions have led to a large surge in teleworking resulting in low use of vehicles. Demand was so low for oil that for the first time the prices for West Texas Intermediate or ‘WTI’ were negative. Price for Brent crude oil also dropped dramatically. In the end, the lack of demand compounded by oil price wars between Russia and Saudi Arabia probably led to very difficult operating conditions for the oil majors.
Today, oil is priced higher than the lows but probably still lower than breakeven for most oil majors. The current price for WTI Crude is $42.71 per barrel and the current price for Brent Crude is $45.57 per barrel.
Final Thoughts on the Dividend Cut by BP
There is a lot of uncertainty with COVID-19 and oil prices. The timing of resumption of ‘normal’ operations for airlines, cruise lines, freight, cars, trains, etc. is largely unknown at this time. Further, oil prices are a big wild card. Demand is low and storage facilities are relatively full. The world has too much oil being produced and not enough being used. It is unclear if OPEC and other oil producing nations will maintain lower levels of production. Further, the rise of electric vehicles is likely impacting demand. Electric vehicles are gaining market share and will continue to do so in my opinion. This will reduce demand for oil and gasoline.
BP’s new dividend rate is more sustainable, but it is unlikely to be raised in the future. The current yield is nice but investors seeking a dividend growth stock should look elsewhere.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.