BP plc (ADR) (NYSE:BP) stock has slipped since a disappointing fourth-quarter earnings report earlier this month, and there could be more weakness to come. The most notable takeaway from the report was that BP needs $60 oil simply to break even. With Brent oil below $56, that implies potential pressure on the dividend paid on BP stock — and BP earnings going forward.
The issue with the $60 breakeven isn’t just that Brent prices are currently below those levels. It’s that major industry peers such as Exxon Mobil Corporation (NYSE:XOM) and Statoil ASA (ADR) (NYSE:STO) have lowered their own breakeven levels. So, if an investor thinks oil will go down, or stay flat, shares of BP stock make little sense. If an investor believes oil will go up, then BP stock still shouldn’t be a buy because there are better options out there.
What $55 Oil Means for BP Stock
It’s not as if BP is going bankrupt, or BP shares are going to zero, simply because Brent is below $55. At the same time, however, it’s difficult to see much of a catalyst for BP stock in the near term, barring a major rise in oil prices.
For one, BP doesn’t have much room left to improve that breakeven level. It’s already taken out some $7 billion in cash costs over the past two years, according to its Q4 release. The cost reductions came in a year ahead of schedule, but that means there’s little fat left to cut.
Admittedly, some of the pressure on 2017 spending is coming from projects that should create longer-term returns (if oil markets cooperate). A joint venture with DET NORSKE OLJ ADR (OTCMKTS:DNKJY) should add 250,000 barrels per day in production. BP has added exploration interests in Abu Dhabi and Africa, both of which promise low-cost oil and gas production.
BP is returning to the Gulf of Mexico — site of its Deepwater Horizon disaster — with the “Mad Dog 2” project, for which it is has lowered costs tremendously.
The catch for BP stock, at the moment, however, is that these projects are largely coming online in 2020 and after. And, there are concerns along the way; any further pressure in Brent prices would not only hurt BP stock, but would push its negative free cash flow down even further. Again, with cost-cutting complete, BP doesn’t have an answer in that scenario. It will still need to support its production agreements, meaning there’s little left in the way of flexibility.
One casualty could be the BP dividend. Management said on the Q4 earnings call that it was considering a “scrip” dividend — in other words, payment in BP shares instead of cash. That could hit BP stock as dividend investors, and dividend ETFs, rebalance. Concerns about the sustainability of the dividend dogged Chevron Corporation (NYSE:CVX) for some time, keeping a lid on its stock. The same could happen to BP shares.
Is BP Stock the Best Way to Play Oil Prices?
Again, BP stock isn’t going to zero by 2019. And, higher oil prices could alleviate a lot of the concerns about its ability to support both exploration costs and the dividend.
But, higher oil prices would help other oil stocks, too — and they seem like smarter, if not outright easier, plays in the mid-term. As the Wall Street Journal reported, Statoil lowered its breakeven cost from $60 to $50 this month. In fact, its major Johan Sverdrup field has breakeven costs of just $25 per barrel.
Royal Dutch Shell plc (NYSE:RDS.A) is in the black on a cash flow basis, as is Exxon Mobil. Chevron said on its Q4 earnings call that it expected to be “balanced” in 2017 in terms of inflow and outflow.
Those are just the major plays. Wellhead costs in U.S. shale plays continue to tumble, providing more flexibility when dealing with current oil prices. And, through ETFs and ETNs like the United States Oil Fund LP (ETF) (NYSEARCA:USO), individual investors can simply buy direct exposure to the oil price.
There’s a saying that certain stocks “go in the ‘too hard’ pile.” In other words, trying to analyze the company is so difficult that it’s just not worth the effort. BP stock isn’t necessarily that difficult to analyze, but its path to upside seems “too hard.”
The dividend (at least the cash portion) is at risk. There’s still another $8 billion in cash costs — at least — coming from the Deepwater Horizon tragedy. Oil prices aren’t high enough to cover its exploration activities and its dividend. Debt increased over $8 billion last year alone, with another rise likely this year. Meanwhile, investors have to wait out three-plus years of oil price volatility before BP stock shows the true impact of recent production spending.
All of that has to work out — and oil prices need to rise. It’s just too hard. There are easier plays out there than BP stock.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.