BP’s Dividend Sangfroid May Not Last Long

Bernard Looney is putting on a brave face. Days after Norwegian peer Equinor slashed its first-quarter dividend by two-thirds, BP’s (BP) chief executive announced he will distribute $10.50 per share to investors, unchanged from the previous quarter. The $79 billion UK oil major’s sangfroid is impressive for a three-month period in which the price of a barrel of Brent crude fell from $70 to less than $25. It may not last.

On the face of it, Looney should be conserving cash. Multiply BP’s $952 million of first-quarter operating cash flow by four, knock off $12 billion of capital expenditure, and the company will burn through $8.2 billion this year. Paying out the same dividend as last year would increase the hit to $16.6 billion. But BP has double that amount in cash and unused debt facilities. Besides, cash flow suffered because falling crude prices reduced the value of the group’s inventory stocks – a metric that may reverse if prices recover. Without that, operating cash flow in the quarter would have been more like $5 billion.

Still, ever since short-term U.S. oil futures plunged into negative territory on April 20, optimism has looked ill-placed. West Texas Intermediate crude for delivery in June was worth little more than $10 a barrel on Tuesday morning. If prices stay depressed for much of the rest of the year, BP’s operating cash flow will deteriorate, and the company will have to borrow even more to pay its dividend.

Looney’s problem is that net debt, at 36% of total capital, is already higher than that of rivals Total, Chevron (CVX), Royal Dutch Shell (RDS-A) and Exxon Mobil (XOM). Even if the first-quarter spike from 31% was partly because foreign exchange movements hit the value of BP’s equity – again, potentially a short-term issue – the group is less well placed to absorb further increases in leverage. To make matters worse, a $4 billion cheque due this year from the sale of Alaskan assets to Hilcorp Energy will be paid more gradually to aid the buyer.

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