Listen to this article
BP’s shares offer investors an enticing yield. At almost 7 per cent, it is among the highest in the sector and in fact accounts for an eighth of all dividends that will be paid by FTSE 100 companies this year. It also just produced a relatively good set of results. In the second quarter, it pumped out $3.1bn of profits – more than expected although substantially less than last year. Still, at $52 a barrel, oil prices were also half their 2008 level. Output rose a healthy 4 per cent. It all looked fairly rosy, until you scrutinised the numbers.
BP’s challenge is common to all oil companies: how to balance its books when oil prices are low, while spending on projects that replenish reserves, and keeping investors happy by maintaining the dividend. To that end, chief executive Tony Hayward wants to make the group cash flow-neutral at a $60 oil price. To do that, he has chopped out $2bn of costs in the past six months. Even so, he has not yet got BP where it needs to be.
In the second quarter, BP generated $6.8bn of operational cash flow. Against that it spent $5.2bn on capital expenditure and paid out $2.6bn in dividends. That totals a $7.8bn outflow. In other words, after excluding changes in working capital, BP spent $1bn more than it brought in. Energy prices are not going to help BP close that gap soon. It doesn’t see any imminent rise in energy demand and any economic recovery will be “sluggish”. Instead, Mr Hayward aims to cut out another $1bn of costs. If he hits that target, the dividend should be safe. If not, disposals and the balance sheet will have to take the strain. But BP can only do that for a while.
Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.
If you have questions or comments, please e-mail email@example.com or call:
US and Canada: +1 800 628 8088
Asia: +852 2905 5555
UK, Europe and rest of the world: +44 (0)20 7775 6248