Ever since the Deepwater Horizon disaster, BP plc (ADR) (BP) has been under scrutiny. Would the company survive? How much would it owe in damages? Could it remain competitive?
Most of all, would the BP stock 6.7% dividend yield be counted upon for years to come?
The signs all point to “yes” — BP stock should continue to pay its dividend for some time.
BP Stock Outlook
Despite lower profits, BP stock continues to generate a ton of operating cash flow, and cash flow is where it’s at when it comes to energy. Fiscal year 2015 resulted in $5.9 billion in profit, which was still a big year-over-year decline, but also big in the aggregate. $6.7 billion went out the door as a dividend, but BP also managed to divest about $3 billion worth of assets.
BP owed a ton of money for the spill and is paying $2.5 billion that will show up in Q2 results. All in all, BP stock ended up taking a $61.6 billion charge against results.
There are more divestments to come to help raise cash for the settlements and for ongoing operations. BP will sell a bunch of fuel storage terminals and its share of a pipeline in the U.K. BP has also committed to shedding other assets that will raise billions.
Moreover, BP has said repeatedly that its dividend was safe. Look, at the end of 2015, BP had $29.7 billion in cash and that’s on top of the operating cash flow.
Meanwhile, the ratings agency S&P lifted the BP debt rating to stable from negative last summer, giving investors plenty of reason for relief. That’s pretty amazing, considering the $52 billion of debt it does carry.
Really, though, what this ultimately comes down to for the BP dividend is the price of oil. Oil prices are depressed and are unlikely to remain at these levels, so profitability should only improve. There are numerous crosscurrents at play, but here’s how the general consensus plays out.
First, oil is not going to stay sub-$50 forever. There are supply-demand imbalances, as well as OPEC playing its usual game of geopolitical chicken. Ultimately, it is in OPEC’s best interest to keep the price of oil at a sweet spot that is somewhere between $65 and $75 per barrel. Prices have been down for more than 18 months and are due for a rebound.
The concern is China. Some say that growth there is in trouble, and that will depress demand for all commodities, and therefore the price of oil will stay low. Still, China’s GDP is growing at 6%-7% and that’s robust by Western standards.
Then we have the advantage of extraction costs declining over time. Technology is improving day by day. As oil prices rise, the incentive to invest in R&D becomes greater, but it’s not as if it all grinds to a halt when prices are low.
With costs of extraction falling, the price at which oil exploration and production become profitable also falls.
Long-term, BP stock probably represents a value opportunity for retirement. There is risk in that it is not on the same solid footing as some of its peers, but that also means that there may be more upside.
As of this writing, Lawrence Meyers did not hold a potion in BP.
