by Ahmed Isthiaq
BP p.l.c. (NYSE:BP) is an integrated oil and gas firm with operations across six continents. BP's upstream operations (including TNK-BP) produced 3.5 million barrels of oil equivalent per day during 2011. Downstream operations include refining, chemicals, lubricants, and service stations. As a result of the Macondo oil spill, BP is in the midst of a $38 billion divestiture program, of which $26.5 billion has been completed as of June 30.
BP offers attractive dividends, and currently, the company has a dividend yield of 4.46%, and an annual dividend of $1.92. BP has a manageable payout ratio of 29.7%. In order to measure the dividend stability of the company, I take a look at the financial performance and position of the company. I have conducted a thorough analysis of free cash flows in order to determine the dividend stability of the company. All the data used in the analysis was taken from the SEC filings of the company.
Free Cash Flows:
Free Cash Flows
Depreciation and other noncash charges
Funds from Operations (FFO)
change in noncash current assets
change in noncash current liabilities
Operating Cash flows
Free Operating Cash Flow
Source: SEC Filings
In the previous three years, net income of the company has demonstrated a mixed trend. At the end of 2009, net income stood at $16.578 billion, but the company took a loss of $3.7 billion in 2010. The accident in the Gulf of Mexico hit the company bad, and it took pre-tax-charge of over $40 billion. However, the company had strong operations in 2011 and recorded extremely impressive net income of $25.70 billion. BP funds from operations are extremely impressive and have increased over the past three years. FFO for BP came down to $7.4 billion in 2010 but again went up to just below $39 billion by the end of 2011.
The cash flows from operations for the company decreased over the last three years. At the end of 2011, cash flows from operations stood at just above $22.26 billion as compared to $27.73 billion at the end of 2009. BP makes substantial capital expenditures, and in the previous three years, the company spent a total of $56.9 billion. However, the capital expenditure has declined gradually during the past three years. Due to high capital expenditures and losses from the Gulf of Mexico incident, the company had negative free cash flows for 2010. In 2011, free cash flows situation improved, and the company had over $4 billion in free cash flows.
Funds from Operations(FFO)/Total Debt
FFO/Capital spending requirements
Free Operating Cash Flow + interest expense/ Interest expense
First ratio shows that coverage provided to debt by FFO has improved over the past three years. The ratio for BP has improved marginally to 1.05 at the end of 2011, compared to 0.96 in 2009. FFO to total debt ratio indicates that the firm generates enough funds from operations to cover its total debt. The second metric in the table (FFO to capital spending requirements) shows that the capital spending requirements of the company has been appropriately covered through internally generated funds. In fact, the ratio has improved over the three years, indicating the firm is in a stronger position to fund its capital spending requirements.
BP free cash flows declined during the past three years, which resulted in a decline in free cash flow coverage ratio. For 2010, the ratio was negative, but it recovered in the following year. Finally, the interest coverage ratio for the company is extremely impressive, and it should not face any trouble meeting interest obligations. Overall, the metrics indicate the firm is in excellent financial position.
Current year Expectations and Impact on metrics:
For the current year, BP profitability has not been impressive. BP recorded second quarter profit of $3.7 billion, 35% lower than the last year and 23% less than the first quarter. The reason for the decline in revenues was a fall in oil prices and lower contributions from US gas. The sharp decline in oil prices also led to some unusually large Duty Lag and foreign exchange effects in TNK-BP and adverse pricing of feedstock into US refineries. Further, big maintenance program undertaken in the Gulf of Mexico also impacted the results.
The company reported cash flow from operations of $7.8 billion in the first half of the year, of which $4.4 billion was generated in the second quarter. BP has announced an agreement to sell its 50% share in TNK-BP to Rosneft, a Russian integrated oil and gas company. BP will receive $17.1 billion in cash and shares representing 12.84% of Rosneft. After the completion of the transaction, BP will hold 19.75% of Rosneft. Overall, the earnings and cash flows will be weaker for the company during the current year than the previous. However, the company should have enough cash flows to maintain its dividends.
Declining oil prices have affected the oil and gas companies. A steep fall in price from $126 to $90 per barrel affected the profits of the company. However, my analysis indicates that the company is still in a strong financial position. BP should be able to maintain its attractive dividend payout. At the moment, we are witnessing a recovery in gas prices and an increase in demand for oil. Future business prospects remain bright for this giant, and investors should be able to enjoy healthy yield for the foreseeable future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.