The BP share price held firm today, even thought the oil giant reported a 66.5% drop in first-quarter underlying profits to $791m. Net debt jumped $6bn to $51.4bn. Markets knew what to expect, as the oil major is reeling from the Covid-19 lockdown and a vicious oil price crash.
The good news is that BP (LSE: BP) is standing by its dividend, for now, even as more than a third of FTSE 100 companies have axed theirs. This leaves the stock offering a mind-boggling yield of 10.23%, which is hard to resist. It’s a buy for me, but a brave one.
The BP share price fell by half in the early weeks of the coronavirus stock market crash, with only a tentative recovery lately. Its troubles are hardly surprising, as the world swims in a metaphorical sea of unwanted crude, and oil producers are paying people to take it off their hands.
Stock market crash bargain
The world is sitting at home rather than driving and flying and today, BP reported a 50% drop in fuel demand. Total Q1 revenue fell 11.7% to $59.5bn. Continuing to pay the dividend will delight investors, but it won’t come cheap.
Management is taking the axe to capital expenditure and selling assets, but that can only go so far. At some point the oil price must recover, otherwise the BP share price will decline further, and that dividend will become unsustainable.
BP also needs to continue squeezing operating costs, a process that began after oil fell to $26 in July, and is now even more pressing. Analysts at Redburn recently put BP’s breakeven price at $53 a barrel. At time of writing, Brent stands at below $20, with WTI at just over $10. BP is aiming to reduce its breakeven price to $35. But, as you can see from those figures, it needs the oil price to recover as well. The sooner the better.
The BP share price can bounce back
As the world wearies of self-isolation, it will start burning oil again. However, I wouldn’t expect a quick return to former consumption levels, especially from airlines.
These figures run to 31 March, and the oil price crash only made itself felt in the last month. The next set of quarterly numbers are likely to look even worse, menacing the BP share price again. New BP boss Bernard Looney has committed to making the business carbon neutral by 2050, so has a lot on his plate. It still has Deepwater compensation payments to fund too.
The dividend lives to fight another day, but Looney didn’t make any promises about maintaining the payout. However, BP stood by its dividend during the last crash in 2016, defying the sceptics, and investors who bought then were glad they did.
Even a 50% cut would still leave the BP share price yielding around 5%. I’d grit my teeth, and buy it.
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Harvey Jones has no position in any of the shares 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.