When oil prices fell to levels not seen in decades, markets braced for a sharp drop in BP’s (NYSE:BP) profits. Despite the weak energy market, however, the company on April 28 maintained its 63 cents per share dividend. By not cutting its dividend, the company has ensured that it will not lose its long-time income investors, including me.
Will BP’s new $10 billion credit facility and the $7 billion of bonds it recently sold keep it in good financial shape? Should BP cut or suspend its dividend?
BP Stock Has Been Lifted by Its Dividend
BP increased its dividend in the fourth quarter. It appears that the company would rather cut its capital spending sharply while appeasing income investors. Plus, after its aggressive cost cutting, BP is aiming for a break-even point of below $35 per barrel of oil in 2021. Last year, it had a break-even point of $56 per barrel.
BP’s bet that oil prices will rebound is reasonable. The novel coronavirus outbreak that began in China late last year and spread to the rest of the world has reached a peak recently. European countries and various American states have begun re-opening their economies. That will lead to a rebound of economic activity, which in turn will drive energy demand higher. But if BP’s bet on a recovery does not turn out to be a winning wager, then it will have to consider reducing its dividend to improve its cash flow.
Weak Q1 Results
BP stock did not plummet even though the company reported underlying replacement cost profits of $800 million, down from $2.4 billion during the same period of 2019. Its cash flow fell to $1.2 billion, down from $5.9 billion in Q1 of 2019.
BP had lower liquid and gas sales, while its Rosneft unit contributed less in the period. Capital expenditures accounted for most of its $5.7 billion of cash outflows. Dividends were the second-highest drain on its cash. Still, the firm’s $32 billion of liquidity, which includes undrawn facilities, eliminates any possibility of a cash crunch, regardless of oil prices.
BP has $15 billion of asset sales due to be completed by mid-2021. Plus, the divestment of its Alaska operations will give its operating efficiency a lift. BP said that “we have significant divestments underway which we think will help reduce net debt over time. The phasing of those, of course, is subject to market conditions.” Its reference to market conditions includes such things as the price of Brent oil.
For Q2, BP expects lower upstream production. It also forecasts a sharp drop in downstream product demand in the European and North American markets.
Operational Adjustments
BP managed to keep its liquefied natural gas facility in Western New Guinea open. It has 6,000 retail staff in the U.K. “providing essential services, fuel and delivery services.”
Based on its future cash flow which assumes a bright future ahead, BP stock could be worth almost $60 per share, according to simplywall.st. Analysts are not quite as bullish, with most ranking the stock a “hold.” Their average price target is $29.39, according to Tipranks. Similarly, the model below, based on forecast earnings, suggests BP stock is worth around $23.50.
| Metrics | Range | Conclusion |
| Adjusted Earnings | 543.2 M – 13.015 B | 7.816 B |
| Discount Rate | 8.0% – 6.0% | 7.00% |
| Fair Value | $0 – $55.38 | $23.44 |
Data Courtesy of finbox.com
Buying energy stocks when the world does not need more oil is riskier than the metrics suggest. But if the world returns to normal and the economy recovers to full capacity, oil prices will have to increase. BP is positioned to earn strong profits in such a scenario.
Chris Lau, contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. Lau owns BP stock.
