Without A Dividend, What's Left For BP Shareholders?

| About: BP p.l.c. (BP)

Summary

While the shareholders of BP have been suffering from the collapse of the oil price, their only consolation has been the generous dividend of the stock.

However, the dividend is higher than the earnings of last year and the expected earnings of 2016, which have been revised downwards by 32% only in the last two months.

Even worse for the dividend, BP has a multi-year expansion plan until 2020 with huge capital expenses, while its unprecedented divestment program ended last month.

The shareholders of BP (NYSE:BP) have been suffering since the collapse of the oil price began in the summer of 2014. To be sure, the stock has lost 43% off its peak of $53.48. Even worse, the outlook of the oil market keeps deteriorating due to its excessive supply. So far the only consolation for BP shareholders has been its generous dividend, which currently corresponds to an 8% dividend yield. Therefore, as conditions keep getting gloomier for the oil majors, the big question for the shareholders of BP is whether the dividend will be maintained or if it will be cut drastically.

First of all, BP's management has repeatedly proved its shareholder-friendly character. More specifically, it reestablished the dividend just 9 months after the Macondo accident in 2010, and has repeatedly reassured investors that it will do its best to maintain the current generous dividend. To this end, it has been divesting assets at an unprecedented rate since 2010, while it has also renegotiated prices with the company's suppliers to significantly cut expenses.

Nevertheless, while there is no doubt that the management is doing its best, the conditions in the oil market are extremely adverse. To be sure, oil is currently trading near its 12-year low, thus exerting great pressure on the results of the oil majors. Consequently, only in the last 2 months, BP's expected earnings for this year have been revised down by 32%, from $2.26 to $1.54. This does not bode well for the dividend, which is $2.40 per year. It is also remarkable that 2015's earnings ($2.07) were lower than the dividend as well. Obviously, the company cannot keep paying a dividend that is much greater than its earnings.

Even worse for the dividend, BP has a multi-year expansion plan in place until 2020 with huge capital expenses to replenish its oil reserves. More specifically, its capital expenses amounted to almost $20 billion in 2015 and will remain elevated at least until 2020 due to numerous growth projects. Since the accident, the company has been funding its capital expenses mainly from its divestment program, which generated $38 billion during 2010-2013 and has generated almost another $10 billion in the last two years. However, this unprecedented divestment program came to an end last month, and hence the company will have to start funding its investment projects from its earnings this year. This does not bode well for the dividend, particularly given that there is already an expected deficit of about $2 B between the dividend and the expected earnings this year.

It is evident from the above that if BP wants to maintain its current dividend without curtailing its growth projects, it will have to add almost $20 B of debt this year and a similar annual amount in the next few years if the price of oil does not experience a strong, sustainable rebound. The additional debt will burden the company, as the interest rates are expected to rise from now on and there is already a net debt of $113.2 B in the balance sheet (as per Buffett, net debt = total liabilities - cash - receivables), which is 16 times last year's earnings and 37 times this year's expected earnings. Even worse, the company has to pay $1 B every year for the next 18 years for the settlement of the accident in Macondo.

All in all, if the price of oil continues to trade below $40-$50 for the rest of the year, it will be extremely difficult for BP to maintain its current dividend. The pronounced capital expenses and the already leveraged balance sheet do not leave much room for a dividend greater than the earnings. I believe that the management will wait for one or two more quarters to see whether there is a great improvement in the oil market. If there is no improvement, the management will decide to cut the dividend. This is not as harmful a decision as it would be for the dividend aristocrats Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) because BP eliminated its dividend after Macondo and hence it does not have the remarkable streak of dividend growth that the others have. Nevertheless, if the oil market outlook does not improve significantly in the next 1-2 quarters, the dividend will be cut. Even worse, the cut will be drastic, about 75%-80%, to be meaningful. This is also the example of dividend cuts experienced by other oil companies, such as the 75% cut from Ensco (NYSE:ESV) and the 75% cut by Kinder Morgan (NYSE:KMI).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.