BP: After the Dust has Settled

By Robert Sutherland Smith

BP (BP.) continues to be an investment of well publicised, intriguing complexity.

The politics of the international embargo of Russian goods (the company has a large trade investment in the big Russian oil company Rosneft) make the Ukraine talks highly relevant to market sentiment towards the BP share price. Finally, there is the outlook for the oil price in the long term. All these things are of course reflected in market estimates. 

The recent preliminary results for BP reported for the year to 31st December 2014 contained a beacon of bright encouragement for investors; it was the management’s declaration that the dividend had ‘first priority’. Hardly surprising perhaps for a company which, like a proverbial canoe, is up a Creek without a paddle and rumoured to be the subject of a possible acquisition by Royal Dutch Shell or the US oil giant Chevron.

As a consequence of that, plus some estimated recovery in revenue next year (to 31st December 2016), the latest market consensus forecast is for earnings to recover sharply next year although they are not forecast to get back to last year’s level. So for anyone buying these shares now, they do so on a market consensus of a poor 2015 (the current year to December) for earnings and a partial but significant recovery next year. In short, the consensus discounts of a 30% fall in sales revenue and a 44% drop in earnings per share.

One piece of recent good news is the ruling by a US District Court to cap the possible fine under the US Clean Water Act at $13.7 billion dollars. So markets now at least know how long that particular piece of string is. However, the civil claims are a different matter. Presumably, BP must be a long way towards settling those.   

Very simply the market is currently looking for earnings of around 24p this year with a dividend payment of around 26p for this current year and 35p/26.27p respectively for next year. To put that into context, the market consensus is for an estimated one eighth recovery in top line sales revenue next year. It  means that oil company analysts are expecting and forecasting that the oil price will prove volatile and start its recovery sooner rather than later. It is my impression that such a view is consistent with the history of crude oil prices and fits in well with the imputed strategy of Saudi Arabia (a very low cost producer) to stop the flow of US shale oil (with much higher costs of production) which is a long term competitor to its own production.

That policy seems to be bearing fruit. Amidst talk of cut backs and shut downs in US shale oil and others in the high cost North Sea fields, both West Texas Light crude oil and Brent crude bounced in January. It is the conjecture of some analysts that an oil price at or below $70 will keep the lid on the shale competition. There seems to be a lot of oil in stock at the moment and that will have to be run down.

So far as the BP dividend is concerned, the latest annual balance sheet had enough operating cash to cover both capital spending last year and the dividend. In fact year end cash rose on annual basis by 32% to a reported $29.76 billion. That is in part due to the sale of assets in recent years to fund the Gulf of Mexico. Total assets shrank from a reported $305.7 billion in 2013 to a reported $284.3 billion last year. Going forward, the company expects to be cutting capital expenditure in response to the low oil price and continues to sell certain assets. That would clearly add cash and credence to a dividend policy of “first priority”. Although the equity value (the balance sheet assets attributable to ordinary shares) including goodwill has come down from $129 billion in 213 to $111 billion last year. I estimate assuming an average exchange rate of $1:50 to a pound that probably implies around 400p a share. If that is the case, then investors are only paying around an estimated 54p for the earnings.