This article will focus on the last of the "Four Ds" mentioned by BP (NYSE:BP) that are the near-term priorities for the company. I'll focus on the other three "Ds"in future articles, since I believe investors need to consider the importance of the dividend and the transformation of the company. In terms of cash costs, BP has reduced controllable cash costs by $3.4 billion compared with 2014 and are projecting to have that number increase to $7 billion by 2017 as the company becomes leaner by cutting the unnecessary "fat." As a side note, investors must also consider how the long-term BP will emerge very lean and will have stronger earnings when the price of crude oil recovers. For a closer look at the oil market, click here.
Below are the "Four Ds" that BP CEO Bob Dudley stated are the near-term priorities for the company:
- Ongoing delivery in the business
- A disciplined reset of capital and cash costs
- Completing the planned divestments
- Maintaining the dividend
BP has been known for the Deepwater Horizon fire and spill that caused a significant liability for the company and a loss of life for those on board. In the current times, BP is an oil major in a very volatile oil environment. As oil prices have crashed from values of well over $100 to under $30 in just a short time, oil companies are feeling the pain. While the current situation is a sliver of excess supply over demand, the unwillingness of OPEC to reach a deal to rebalance the market has caused the price of oil to reach 13-year lows. While it is predicted that the price of oil should recover modestly in the second half of the year, that is still months away and certain oil companies are priced at bargain prices.
Last week, BP held its quarterly conference call and announced substantially lower profits for the quarter and for 2015 as a whole. Fourth-quarter profits were $196 million, which are a drop of 91 percent compared with the $2.2 billion in the fourth quarter of 2014. For 2015 as a whole, profits were $5.9 billion, which are 51 percent lower than 2014's $12.1 billion. BP distributed $6.7 billion to shareholders through dividends. Organic capital expenditure was $18.7 billion compared with the projected $20 billion. Divestment proceeds of $2.8 billion for 2015 and $230 million for the quarter. BP earned operating cash flow including oil spill outgoings of $19.1 billion for 2015 and in the fourth quarter earned $4.8 billion. If all stayed the same BP could potentially have operating cash flows of $19.6 billion for 2016.
The commitment that BP has for its dividend was stressed extensively in the conference call with executives and the company presentation. When examining the stability of BP's dividend, the access to cash and the operating cash flow are two important numbers to examine. As of Dec. 31, 2015, BP had cash and cash equivalents of $26,389 million compared to $29,763 million on Dec. 31, 2014. The decrease in cash of $3,374 million can be explained by the cash flow statement with a source of cash from operating activities of $19,133 million, a use of cash in investing activities of $17,300 million, and a use of cash in financing activities of $4,535 million. The operating activities includes a loss before taxation of $9,571 million that severely impacted the cash flow from operating activities. The investing activities use of cash was lower than 2014 due to a capital expenditure decrease of $3,898 million.
The key takeaways from the financing activities are the $8,173 million from long-term financing, no stock repurchases, $6,426 million to repay long-term financing, and $6,659 million distributed to BP shareholders through dividends. It is important to consider how long BP can afford to pay the dividend in the current environment. The fourth quarter and 2015 provided a bear case scenario for oil prices and can be used to project how long the company can continue to pay out the dividend in this environment. The dividend currently and all of the company's cash flow activities are using $3,374 million per year of cash. Theoretically, BP could continue to pay the dividend and meet its cash flow obligations form 7.8 years (26,389/3,374). It would be irrational to think that the oil price will stay at these prices from more than a year or so. The company can continue to meet its obligations and the cash position will be cushioned by any additional divestures made by the company.
To be fair and consider all of the situations, in the event that the company slashes the dividend by 50% the company will actually break even on a cash flow basis assuming fiscal 2015 numbers. When management repeatedly mentions that the commitment to the dividend, I make the assumption that it is safe minus a disaster in operations.
Source: Yahoo Finance
BP has had its shares decimated in the past year as seen in the chart above. The company is preparing its balance sheet for lower prices and it is a "safe" position with its balance sheet and cash flow. As stated above the company can continue to pay the current dividend for just under eight years according to 2015 results. Investors must understand that the oversupply of crude compared to demand is between 1.5 and 2 million barrels per day. As demand grows and supply due to low prices starts to head down then the market will rebalance. Additionally, over time the excess supply that is in storage tanks will go into the market and will correct itself.
Disclosure: I am/we are long BP.
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.