Today I am looking at oil leviathan BP’s (LSE: BP) (NYSE: BP.US) dividend outlook past 2014.
Dividend expansion on unsteady footing
On the face of it, BP’s operational outlook for the years ahead looks set to underpin strong earnings, and thus dividend, expansion in the years ahead. The firm has a solid suite of production ramp-ups scheduled for this year and beyond, while recent news of a massive oil find in the Gulf of Mexico, as well a massive, three-decade gas supply and production agreement signed with Oman, boosts its long-term production profile.
But in the meantime, the effect of heavy asset divestments, weak refining margins and poor performance at its Russian projects continues to crimp earnings. Indeed, these issues forced underlying replacement cost profit to $3.69bn during July-September, down from $5.02bn in the corresponding 2012 period.
These problems are likely to continue well into the future, with weakness in the bottom line anticipated to be worsened by collapsing oil prices. Indeed, Deutsche Bank today slashed its WTI crude forecasts for this year and next to $88.75 and $85 per barrel respectively — WTI was recently trading at $94.40.
As well, BP still has the fallout of the 2010 Deepwater Horizon oil catastrophe to contend with. The firm received a massive kick in the teeth this week when it lost an appeal in the US courts over a settlement made back in September 2012.
The deal means that BP will still have to pay claimants who have received no financial loss related to the spill, potentially opening the way for billions of dollars more in fines. The company has set aside $9.6bn in provisions to cover costs, a figure which continues to edge ahead of the original $7.8bn settlement made in 2012. And the case is still far away from a final resolution.
The City’s number crunchers expect the oil giant to bounce back from a horrendous 55% decline in earnings last year to punch 27% growth in 2013. Growth is expected to slow to 15% in 2014 and 3% in 2015, however.
And analysts expect BP to keep annual dividend growth rolling beyond this year, although this is expected to slow from the breakneck speed of recent years. For 2013 forecasters anticipate the full-year payout to rise a chunky 10% to 37.4 US cents, with an additional 8.3% increase pencilled in for 2014 to 40.5 cents. A further 4% increase, to 42.1 cents, is expected in 2015.
These payments, if realised, are set to drive yields over the 5% marker, with a 4.6% readout for last year rising to 5% and 5.2% in 2014 and 2015 respectively. And investors can also take comfort that dividend cover is set to rise marginally to 2.2 times anticipated earnings for this year and next, up from 2.1 in 2013 and above the safety watermark of 2 times.
Still, in my opinion the possibility of heavy legal penalties could crimp earnings, and could prompt further rounds of divestments to cover costs. Coupled with a muddy outlook for oil prices, in my opinion BP may struggle to match previous dividend growth rates in coming years.
