Profits may be down but BP has still managed to increase its dividend. It's currently yielding a massive 8%.
As investors know to their cost, oil companies' accounts aren't for the faint-hearted.
For a start, the terminology is different from that found in the accounts of the typical manufacturing company or retailer. So BP (LSE: BP), which reported its 2009 first-quarter results today, speaks of 'replacement cost profit', and not 'profit'. Like much of the rest of the industry, too, BP accounts in U.S. dollars (despite being headquartered in London), leaving UK-based investors open to currency movements -- which are sometimes in their favour, and sometimes not.
The business model is different, too. In simple terms, crude oil and natural gas -- the company's two major raw materials -- are 'free' resources, extracted from the ground at a cost, refined, and then sold to customers at a price markup that takes as its starting point the price that crude oil is traded for in the world's energy markets.
The result is financial accounts that combine impenetrability with a tendency towards volatility -- never a particularly welcome combination.
Profits plunge
So it is with BP. Replacement cost profits plunged 62% during the quarter, hit by falling demand -- due to the recession -- and also a fall in the world price of crude oil. This time last year, the price of crude was heading upwards to its eventual July 2008 peak of $147. Now, it's around $50. In simple terms, every barrel of oil that BP extracted from the ground last July it got $147 for. Now, it's getting only $50.
BP, of course, is one of the very largest companies in Britain -- the second largest, in fact, behind fellow oil giant Royal Dutch Shell (LSE: RDSB).
So imagine if one of the country's other major companies -- such as Tesco (LSE: TSCO) or GlaxoSmithKline (LSE: GSK) -- had announced a 62% fall in profits. On second thoughts, don't imagine what would have happened: simply recall the events of the last six months or so in the banking sector. At the slightest whiff of falling profits, share prices have been trounced -- hard, and fast.
Not at BP, where the stock market shrugged off the results by marking the shares up. As I write these words, they're up 1.5 pence, a rise of 0.3%.
But the dividend is increased
In part, that's because the 62% fall in profits has made no difference to the dividend. Actually, that's not quite right: the dividend has changed: the board have increased it slightly, from 13.525 cents a share for the same quarter a year ago, to 14 cents a share for this quarter. And here come those currency effects again: although that's only a 4% increase in US dollar terms, the result is a whopping 40% increase in sterling terms
And if the increase in the dividend is helping to calm investors' nerves, so too is the newsflow.
Not so long ago, the news coming out of BP was uniformly bad. The chief executive, Sir John Browne, departed suddenly, under a cloud. Its joint venture in Russia, TNK-BP, saw a nasty spat with the investors behind the Russian part of the business. And a series of spillages and refinery explosions left investors and legislators alike feeling queasy about the adequacy of the company's management culture.
Production up, costs down
Today, the torrent of bad news has stopped, and BP is able to point to some solid advances. Production is up (2%), costs are down (11%), commercial production from two Russian oil fields has started, more oil has been found off the coast of Angola, and new wells have come on stream in the Gulf of Mexico.
Obviously, the company can't go on reporting falling profits and paying out hefty dividend increases. The fall in reported profit had been widely anticipated, and some analysts had pencilled in a dividend reduction. But BP's board -- and its chief executive Tony Hayward -- think that the increase is justified, given the present price of crude oil, the newsflow, and the prospect for further cost savings.
Yielding around 8%, and currently trading at around 485 pence, BP's shares today are an even more attractive proposition than they were even a few months back. Not as cheap -- relative to the rest of the FTSE 100 -- as in 2007 and the early part of 2008, but I think they are still a very solid 'buy'. BP is a big company that's going to get even bigger -- and in the process, throw off a healthy stream of dividends.
More from Malcolm Wheatley:
Of the companies mentioned, Malcolm Wheatley owns shares in BP and GlaxoSmithKline.
