A week ago, I took a look at Exxon Mobil Corporation (NYSE:XOM). I dissected its ability to pay its dividend and handicapped the likelihood it would be able to maintain that payout. Since this is a trying time for energy stocks, it’s time well spent to do the same for BP plc (ADR) (NYSE:BP). So, just how affordable is the BP stock dividend to the company?
It’s not wrong to assume the headwinds and tailwinds affecting one company in an industry are also affecting others in the same business. In the case of the energy sector, there’s a fair amount of disparity from one name to the next. Whereas Exxon Mobil’s dividend was marginally affordable, assuming nothing changes in the foreseeable future, the BP dividend is skating on thinner ice.
BP Dividend in Focus
Let’s use the same methodology and even the same chart as we did when we looked at XOM stock, just so you can make a true apples-to-apples comparison.
But, first things first.
While most oil companies have at least a little exposure to the natural gas market, and most natural gas companies do a little bit of crude oil business, BP arguably handles relatively more natural gas than most of its peers. That proportion is also likely to grow going forward.
Aaron Levitt underscored this idea earlier in the month, pointing out how the company was taking on a major natural gas fracking project in the Middle East, committing up to $16 billion on what would have at one time been something BP left for another player to do. And, last month, BP finally began selling natural gas to Mexico, in the wake of lifted trading restrictions.
This is just a sampling of the shift BP stock is making in the direction of natural gas.
The big “so what?” If the dividend BP stock dishes out is going to grow going forward, or even just hold steady, not only will crude prices need to hold the line, natural gas prices are going to have to perk up as well. Though they started a solid recovery effort in early 2016, 2017 has been disappointing. Natural gas futures are knocking on the door of new 52-week lows.
It’s this potential pullback, along with doubts about crude oil’s foreseeable future, that call into question the modestly bullish outlook analysts collectively hold for BP stock right now. These doubts were underscored when Janet Kong, CEO of BP’s Eastern Hemisphere Integrated Supply and Trading, recently made a strategized point directed at OPEC to keep its output contained, suggesting the company doesn’t think OPEC will do so.
Take a look at the graph below, which plots all the past and projected results for BP, underscoring the affordability of its dividend. The blue histogram bars are the net income trend and outlook, not in “per share” terms, but on an absolute basis.
In short, BP stock can’t afford the dividend of 60 cents per quarter being paid out for the ADS right now. It’s been selling pieces of itself to free up some cash (to pay down some debt as well as simply put it in the coffers) and is willing to continue doing so.
That’s not a long-term solution, though. Eventually, the company will have to extract more value from the assets it’s keeping or the projects it’s working on if it wants to avoid moving deeper into debt to keep paying its dividend. The profitability of its properties, however, are still mostly a function of oil and natural gas prices. If they don’t improve in a big way soon, BP, like Exxon Mobil, may have to make some tough decisions. And BP will have to make them sooner than Exxon Mobil.
Looking Ahead for BP Stock
The one bright spot on the graphic above is of course BP stock’s positive operating cash flow per share. It has been and remains above the dividend payout, suggesting the quarterly payments are a little more protected than the earnings/dividend comparison alone would imply.
That’s a somewhat misleading metric for an oil and gas exploration company though, as it doesn’t account for the capital expenditures that are essentially required of the industry to find and cultivate new oil and gas sources. All the bills have to be paid sooner or later.
In its defense, much of the headwind BP has faced that’s put a strain on its books is the lingering fallout and cost of the 2010 oil-spill disaster in the Gulf of Mexico. There’s a light at the end of that tunnel now, for what it’s worth. It’s not going to be game-changing relief, though. Analysts still don’t think earnings will cover the projected dividend payouts.
Whatever the case, just know that the BP stock dividend is anything but a sure thing going forward, at least at its current rate. The company will need to drive a tremendous ROI on its projects and get top dollar for any other assets it sells if the company is going to thread water over the next couple of years.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.