How much longer can BP plc’s dividend hold out?

Alan Oscroft — Sat, 26 Aug 2017 07:29:49 +0000

One of the hardest things to learn in this investment business is to accept when you are wrong.

I remember back in the early days of the oil price crisis, when BP (LSE: BP) chief executive Bob Dudley suggested we were in for a few years of depressed oil prices. He thought that it was a retatively short-term temporary blip, and I went along with him – after all, how can the oil business ever be faced with anything approaching a long-term slowdown?

Those big 7% dividends were surely unassailable, I thought. But now I’m convinced I was wrong.

Longer than I thought

I think the oil-producing nations of the world can keep on going at low oil prices for many years yet, but sooner or later (if the price of a barrel doesn’t pick up), the cash flow taps will slow to a drip and those healthy dividends will surely have to be cut.

Back in the day, if you could get oil out of the ground and to market at a price of anything less than around $100 per barrel, you were almost assured of profits. That’s now ancient history, and with cost-cutting across the industry, many projects with much lower extraction costs are now viable. But that does beg the question of why costs only ever seem to be pared in times of crisis and are presumably accepted at wasteful levels during times of plenty — I’ll leave that as something to ponder.

Though I’ve been confident of BP’s dividend yields of around that 7% mark in the past, I really am starting to lose my confidence. Its restructuring of the past few years has been effective, but it’s increasingly looking like it’s been insufficient to prop up current dividend expectations.

Even more risk

If BP isn’t risky enough for you, what does the current environment say about Tullow Oil (LSE: TLW)?

Tullow is really still afloat only due to a $0.75bn rights issue, and that significantly diluted the ownership of existing shareholders. Debt is the order of the day, and with the company facing $3.8bn in net debt after a $0.3bn loss in the first six months of 2017, does it look like a golden opportunity to cash in on any future oil price gains?

Tullow is actually looking quite decent from a production point of view, with the ramping up of its newly operational TEN Field in Ghana being possibly its most exciting recent opportunity. Five years ago, I think that would have been a great buy signal, but now?

Surely not time to buy debt

With forecast losses suggesting a forward P/E around 14 as late as December 2018 (which is about the FTSE 100 long-term average, but with no dividend expected and risk looking high), I really see the risk facing Tullow shareholders as being incommensurate with the likely reward.

And as a shareholder in Premier Oil myself, another highly indebted oil explorer but with some interesting new discoveries, I really am re-evaluating my whole approach to investing in the oil business.

The post How much longer can BP plc’s dividend hold out? appeared first on The Twelfth Magpie.

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Alan Oscroft owns shares of Premier Oil. The Motley Fool UK has recommended BP. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes

Will Tullow Oil Plc Survive 2016 To Outperform BP Plc?

Ian Pierce — Thu, 07 Jan 2016 08:55:15 +0000

With oil prices starting off 2016 exactly where they left off last year, many investors have begun to prepare themselves for a long period of depressed prices. While it’s a fool’s game (lower case ‘f’) to predict the timing of oil price movements, it’s certainly highly unlikely that prices will remain in the $35 per barrel range for years to come. For investors with a long time horizon, 2016 may well be an opportune time to start exploring shares of oil and gas producers.

Debt load

However, quality will be key as highly-leveraged minor players such as Tullow Oil Plc (LSE:TLW) will find it difficult, if not impossible, to survive several more years of depressed crude prices. Tullow has an enviable array of productive oil fields in West Africa and potential fields in East Africa, but has piled on some $4.2bn of debt to reach this position. These West African fields have produced the lion’s share of Tullow’s revenue and will become even more important once the Ghanaian TEN Field comes online in mid-2016 to increase total production by roughly 50%.

With around 40% of expected 2016 production hedged at an average price of $75 and the revenue from the new TEN field, Tullow appears to some as a bargain. Yet, for the first half of 2015 the company took in 52% more cash from credit lines than it did actually selling oil. It has a mere $1.7bn in net cash and undrawn credit lines available to it as of the end of 2015. This is particularly significant as a further $1bn in capex is necessary just to begin pumping oil from the TEN Field and $2.6bn of debt is due to be amortised over the next three years.

If crude prices remain below Tullow’s estimated $38 to $45 breakeven cost for a significant amount of time, there will be problems. Even the additional revenue from the TEN Field will make it impossible for Tullow to continue without piling on even more debt, or resorting to divestments or a rights issue.

Bagging a bargain

Investors looking to bag a bargain bin oil producer would do much better to consider BP plc (LSE:BP). BP’s sheer size means it has been able to diversify revenue among oil production, natural gas extraction, and downstream refining operations. These refining operations provided BP with $2.3bn in underlying profits for the third quarter of 2015 and have allowed BP’s dividend to hold steady, yielding investors a FTSE-beating 7.6%.

Year-to-date the company has registered a $3bn loss, however this is due to a $9.8bn second quarter charge related to the Gulf of Mexico spill. The $55bn BP has paid out so far led it to divest $75bn worth of assets since 2010 and cut costs across the board. That was even before the dramatic drop in oil prices in 2014 – putting it ahead of other oil majors in rebalancing operations for lower oil prices.

Management is determined to maintain dividend payouts and with a gearing ratio of 20%, has the ability to draw on credit to maintain payouts if oil doesn’t rebound to breakeven prices of $60 p/b range for some time. I view BP’s diversified revenue streams, healthy balance sheet and a possible light at the end of the tunnel for oil spill-related payouts as a reason long-term investors should consider adding it to their portfolio in 2016.

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