Shares in oil giant BP (LSE: BP) have climbed 20% since the end of September, to 383p as I write — although they have lost 10% over the past 12 months.
Some of that uptick will be due to BP’s $20.8bn final settlement over the Gulf of Mexico disaster and the reduction in uncertainty that it brought — big investment institutions hate uncertainty.
But could the recent modest bull run come to an end on Tuesday, when BP is expected to report on one of the worst quarters for the oil industry in years?
The City is fearing a fall in Q3 profit of more than 60%, to around $1.2bn, compared to the same period a year ago — and BP’s figures are expected to presage a similar plunge in the bottom line at Royal Dutch Shell, which is due to report two days later.
But there’s really no cause for panic, as the pessimistic outlook is down to one simple thing, and that’s the price of oil. The price of a barrel is still up from its low point, and has spent a few weeks of reasonable stability in the $48-52 range — though the price has dipped slightly below $48 today.
But over the three months to September, prices for North Sea Blend averaged only around $50 a barrel, while the same period in 2014 saw an average price of $102 — and Q3 prices have been lower than the second-quarter average of around $56 too.
BP, and the whole industry, have been expecting the era of cheap oil to continue for some time, with the International Energy Agency opining that oil prices will remain low for the rest of the year and throughout 2016 as production levels are still high and global economic recovery remains fragile. But what will that mean for BP and its competitors in the medium term?
Dividend cut?
The big uncertainty lies in the dividend, which BP is very keen to maintain at current levels. There’s a full-year payout of 26p per share currently forecast, and BP paid out 6.5p at the end of its second quarter, which is pretty much in line with that expectation. But cash at that level is simply not going to be covered by earnings per share, expected to come in at only around 22p with the remaining 4p having to come from the company’s own resources.
And the gap would continue on 2016 forecasts, with the expected 23.5p EPS falling short of a mooted 25.5p in dividends.
The long-term future of BP’s dividend looks pretty safe, with estimates suggesting there’ll be a 30% rise in worldwide demand for oil over the next 20 years. But over two or three years, would BP really want to turn to borrowing money to hand over as dividends?
It might be a politically wise move to keep income investors happy, and I don’t see any dividend cut happening this year or next, but it obviously can’t be continued indefinitely.
I’d like to hear some details on BP’s dividend plans, both over the long term and in the shorter term, when the firm releases its latest figures tomorrow. But I really can’t see that happening, and all I’m expecting to read is some sort of commitment to the current dividend strategy.
