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Should You Buy BP plc After Profit Slumps 20%?

BP (LSE: BP) (NYSE: BP.US) shares moved higher in early trading this morning after the company announced its results for the first quarter.

BP is the first of the oil supermajors to report (Shell and Exxon Mobil have announcements scheduled for Thursday), so we have our first glimpse of how 2015 is shaping up for the oil giants in the prevailing environment of low oil prices.

Performance

BP put in a decent performance. The company headlined a 20% decline in underlying replacement cost profit to $2.6bn, compared with $3.2bn in the same period last year. Quite a result, when you consider analysts had been forecasting a slump to $1.3bn, and also the dramatic fall in prices since Q1 2014: Brent crude 50% lower and the Henry Hub gas marker price down 40%.

However, BP’s warts-and-all statutory pre-tax profit collapsed by 57% to $2.3bn from $5.3bn, and operating cash flow plummeted to $1.9bn from $8.2bn. Still, at least these numbers are positive, showing BP can still make money in the low-price environment.

Outlook

CEO Bob Dudley said: “We are resetting and rebalancing BP to meet the challenges of a possible period of sustained lower prices”.

That means continuing to progress a $10bn asset disposal programme for 2015, which is already making good headway: management reported that divestments have now reached $7.1bn, including the recently-announced agreement to sell BP’s interest in the North Sea CATS business. BP will also be reducing capital expenditure, as well as cutting costs by implementing simplification and efficiency measures right across the business.

Buy for the dividend and recovery

A big part of the reason for BP raising cash from divestments and focusing on operating cash flow from cuts to capital expenditure and costs is a determination on the part of management to deliver tangible shareholder value through dividends.

Bob Dudley again stressed today that: “The dividend is the first priority within our financial framework and the board is committed to maintaining it.” And, indeed, the company announced a maintained Q1 dividend of 10 cents per share.

With BP’s shares trading at around 483p as I write, analysts’ sterling forecasts for this year’s full-year dividend give anyone investing today a potential 5.5% yield. The compounding effect of reinvesting dividends makes a massive contribution to long-term shareholder returns. BP’s current juicy yield could power your portfolio higher in years to come, and with potential strong capital gains, too, when — sooner or later — oil prices recover.

How does BP’s dividend compare with that of rival Shell? Well, Shell’s shares have underperformed BP’s in recent months, which has actually pushed Shell’s current yield higher than BP’s: Shell offers 6%.

Nevertheless, both companies’ dividends are highly attractive, being well above the FTSE 100 yield of 3.5%. Of course, BP and Shell are exposed to many of the same macro conditions, but there are also risk-and-opportunity factors specific to the companies that could affect their individual performances — for better or worse. For example, BP’s significant expose to Russia, through its interest in state-controlled Rosneft, and Shell’s recently-announced mega-deal to acquire BG Group.

If, then, you’re currently looking to buy into an oil giant, splitting your investment between BP and Shell could be a good option.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.