British Petroleum (BP) is one of the biggest providers of oil, lubricants and other petrochemical products. The company's upstream segment explores for natural gas and oil along with production and field development. BP has presence in several oil rich areas all over the globe, and exploits oil reserves due to its strong management practices and vast experience. Recently, the company has suffered due to a slowdown in the global economy as well as a disaster in the Gulf of Mexico.
However, the company looks to have recovered from the disaster, and it looks set to grow in the future. Furthermore, BP is making solid moves to reorganize its investment and return cash to shareholders. BP is extremely attractive to income investors due to its high dividends. Let's look at the dividend and future growth opportunities of the company along with recent movements.
Sumptuous Dividend Yield
BP is one of the best dividend paying stocks in the market. The company has a long history of cash dividends. However, the company had to suspend dividends in 2010 due to the accident in the Gulf of Mexico. BP again started paying dividends in the fourth-quarter of 2010; this time slashing the dividends in half. At the moment, the company pays an annual dividend of $2.16 per ADS, yielding 5.28%. In October last year, BP increased the dividend payments by 12.5%; however, quarterly dividend payments still remain substantially lower than pre-oil spill levels.
As a result of poor economic conditions, oil spill and a shift in capital allocation, the free cash flows of the company have suffered. BP paid $5.37 billion in cash dividends over the past twelve months. Over the same time period, the company reported free cash flows of $2.68 billion. After the accident in the Gulf of Mexico, BP's payout ratio based on free cash flows has been over 100%. In 2011, BP's payout ratio based on free cash flows was 100.18% -- while payout ratio for the year 2012 has gone up to 200%. Despite a fall in free cash flows, the company has been able to increase dividends over the past two years, which shows the strength of the company.
BP expects operating cash flows to be between $30 and $31 billion during 2014. A big increase in operating cash flows should allow the company to grow dividends in the future and bring down the payout ratio. A big reason for a fall in free cash flows was an increase of over $4 billion in capital expenditures of the company during the last year.
Change in Strategy and Future Growth
British Petroleum has been making efforts to reshape its assets portfolio through divestitures. The company recently sold its stake in TNK-BP, and decided to repurchase share worth of $8 billion. Rosneft, the company that bought BP's stake, paid $16.6 billion in cash and 12.84% of its shares. BP paid $4.9 billion to buy further 5.9% stake in Rosneft. Due to the shake up in the portfolio, BP now has a very high-quality assets portfolio, which has given the company a platform for future growth.
BP has now assigned majority of its capital budget towards building its upstream assets. At the moment, the company has strong pipeline of projects and further four upstream projects will be added to the portfolio by the end of the current year. Offshore drilling is experiencing a boom at the moment. Most of the major energy companies are now exploring for oil in Gulf of Mexico and other oil rich areas. BP has also increased its rigs in the Gulf of Mexico.
With the positives there are also some negatives for the company - the biggest negative is the ongoing lawsuit, which will most likely end in settlement. The company might have to pay substantial amount in damages; as a result, stock price has been suffering.
BP is certainly following an effective strategy, and the company is focusing on more lucrative segments. As a result, the company should be able to achieve substantial future growth. BP will get majority of its production from fields that are already active and most of its production will be oil or oil-priced gas, which should allow the company to have less volatility in the price. Furthermore, the company has planned about a dozen mega-projects, which should drive future growth. BP's future growth strategy is impeccable, and I believe it will achieve substantial growth in the long-term.