Interactive Investor

BP tipped to slash dividend

2nd October 2015 13:02

Lee Wild from interactive investor

Rockbottom oil prices have forced companies to slash budgets and sell assets. BP is no different. Yet despite plunging profits, there's an understandable reluctance among the oilmen to cut dividends. But that may be about to change.

"Big Oil's positive rhetoric on dividend sustainability – not credible in our view – has made yield the key valuation compressor," says JP Morgan analyst Fred Lucas. "We look for even higher yields to accommodate the risk of DPS cuts in 2016 by which time the oil price range should be clearer as should the scope for opex and capex savings."

ENI cut its dividend by 29% this year and Glencore has suspended its payout. JP Morgan has already forecast Austria's OMV and Norway's Statoil will cut theirs too, and now adds BP to the casualty list in 2016. "We continue to believe the market will price in dividend cuts before management acts," writes Lucas, predicting BP, currently yielding a colossal 7.5%, will cut the payout by 30% in the second half of next year.

"Big Oil's dividends were a financial strain at $100/bbl; in our view the same dividends represent liquidation at $50-60/bbl."

But that would be a massive shock for BP shareholders.

(Click to enlarge)

Industry expert Malcolm Graham-Wood described the increase in BP's dividend last year as "border-line irresponsible", but rise it did – shareholders now receive a quarterly dividend of 10 cents a share - and BP remains fiercely protective of the payout. At the first-quarter results in April, chief executive Bob Dudley said:

"The dividend is the first priority within our financial framework and the board is committed to maintaining it, as we have today. We can sustain this by successfully resetting our capital and cost base and rebalancing our sources and uses of cash in the prevailing oil price environment. We will continue to review progress on this as we move through the year."

The European oil sector has underperformed the market by over 50% since the beginning of 2012, and by 13% so far this year, but JP Morgan thinks it has a way to go before it's a 'buy' again.

"For the sector as a whole, we may be approaching a level where we would look to add, but we are not there yet," thinks Lucas. "Ahead of what looks set to be a poor set of Q3 results, we remain cautious and implement another round of 2015-16 EPS and [price target] cuts."

JPM cuts its price target for BP from 475p to 400p, yet retains its 'overweight' rating.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.