BP Dividend is Safe

The combination of increasing leverage in the short-term and asset sales should be more than enough to keep the company on sound financial footing for some time

Stephen Simko, CFA 4 February, 2015 | 11:07AM
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Despite the recent decline in oil prices, BP (BP.) remains on very sound financial footing relative to peers, and is well-positioned to weather the current low oil price environment. As we review today’s fourth-quarter results, we reiterate our view that the company’s dividend is safe. The combination of increasing leverage in the short-term, capital expenditure reductions, and asset sales should be more than enough to keep the company on sound financial footing for some time.  

The biggest news today was BP’s decision to lower its 2015 capital budget to $20 billion, previously guided to be $24 billion to $26 billion. While a variety of areas are seeing reductions, it appears the most significant reductions this year will be in the company’s exploration program. Management is taking the view that is wise to prepare for oil prices remaining low beyond 2015. While this of course would hardly be a positive scenario should it transpire, it would likely lead to a period of capital cost deflation, which could provide sorely needed assistance for companies trying to balance their cash flow sources and uses, this year will be a year of meaningful cash burn for the industry.

Beyond its capital budget, BP is enacting a variety of cost cutting measures, including corporate layoffs and downstream cost reductions initiatives. BP has guided that $1 billion in non-cash restructuring charges are likely, including the $433 million taken this quarter. Finally, the company believes that it still has a few billion dollars of non-upstream asset sales it can close during 2015. Adding it all up, 2015 is likely to stink, but BP’s relatively strong financial position means its dividend is safe, and its legal issues manageable. Our fair value estimate and moat ratings are unchanged.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BP PLC471.65 GBX2.38Rating

About Author

Stephen Simko, CFA  is a senior stock analyst at Morningstar.

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