The big question is, can investors rely on this market-beating income stream, or should you be looking elsewhere for income?
Lower production costs
The oil giant has been hit by a double gut punch this year. First of all, the coronavirus outbreak has slammed demand for oil and petroleum products around the world.
And secondly, the decision by Saudi Arabia and the rest of OPEC to increase oil production at such a sensitive time has sent the price of black gold plunging to a multi-decade low.
The good news is that BP is, to some extent, already prepared for this market. When the oil price last crashed in 2014, the company undertook a massive restructuring program, cutting costs across the board.
These actions have positioned the company well for the current market. At the beginning of 2018, the business told investors that its average unit production cost was down 46% since 2013.
BP’s then head of upstream, Bernard Looney, claimed that the group’s global production costs had fallen from around $13 a barrel in 2013 to $7 for 2018.
The average cost of production varies from region to region. However, reports suggest that the company’s cost of production in the North Sea is less than $15 a barrel. That’s down from more than $30 in 2014.
These numbers imply that even with oil trading below $30 a barrel, BP is earning a profit on every barrel it produces. That said, these figures exclude other costs, such as exploration spending, maintenance and head office costs.
Still, the amounts show BP has the capacity to endure the current market environment.
BP shares on offer
At this stage, it is not very easy to say if BP can maintain its dividend at the current level. Nevertheless, the company has plenty of options. As noted above, production costs are low, which should help the firm continue to cover basic costs.
If the oil price downturn persists for an extended period, management will have to cut costs further. They will also need to reduce capital spending. In this scenario, the dividend could be for the chop, although before eliminating the payout entirely, BP might turn to a scrip alternative.
The company did this in the last oil price crash. Rather than paying investors in cash, it offered shares instead. These actions reduced pressure on the group’s balance sheet and cash flows.
When the market had settled down, the group resumed cash payouts.
It seems likely that it will use the scrip alternative this time around as well. The company might also cut the overall distribution. A 50% cut would still leave BP shares yielding 7.5%.
A combination of both will allow management to continue rewarding investors while keeping the balance sheet in order.
As such, it looks as if BP shares will remain attractive from an income perspective.
Income-seeking investors like you won’t want to miss out on this timely opportunity…
Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this out-of-favour business that’s throwing off gobs of cash!
But here’s the really exciting part…
Our analyst is predicting there’s potential for this company’s market value to soar by at least 50% over the next few years...
He even anticipates that the dividend could grow nicely too — as this much-loved household brand continues to rapidly expand its online business — and reinvent itself for the digital age.
With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.
Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Income Share… free of charge!
Rupert Hargreaves has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.