BP halves div­i­dend after record loss

National Post (National Edition) - - FP INVESTING - RON BOUSSO AND SHADIA NASRALLA

LON­DON • BP cut its div­i­dend for the first time in a decade after a record US$6.7-bil­lion second-quar­ter loss, when the coro­n­avirus cri­sis ham­mered fuel de­mand, and it sought to win over in­vestors by speed­ing up its rein­ven­tion as a lower car­bon com­pany.

Its shares closed 6.5 per cent higher on Tues­day after BP un­veiled ear­lier than ex­pected a plan to re­duce its oil and gas out­put by 40 per cent and boost in­vest­ments in re­new­able energy, such as wind and so­lar, over the next decade.

All ma­jor oil com­pa­nies suf­fered in the second quar­ter as lock­downs to con­tain the new coro­n­avirus lim­ited travel and oil prices fell to their low­est in two decades.

Sev­eral, in­clud­ing Royal Dutch Shell and Nor­way’s Equinor, cut their div­i­dend in re­sponse.

BP CEO Bernard Looney, who took the helm in Fe­bru­ary, avoided a div­i­dend cut in the first quar­ter de­spite wors­en­ing mar­ket con­di­tions and as ri­vals re­duced their pay­outs.

But Tues­day’s 50 per cent cut by BP to 5.25 cents per share, which was larger than the 40 per cent forecast by an­a­lysts, be­came in­evitable given a large debt pile, the col­lapse in oil and gas de­mand and grow­ing ex­pec­ta­tions for a slug­gish global eco­nomic re­cov­ery.

BP’s net loss was in line with an­a­lysts’ ex­pec­ta­tions and was largely a re­sult of the com­pany’s de­ci­sion to wipe US$6.5 bil­lion off the value of oil and gas ex­plo­ration as­sets after it re­vised its price fore­casts.

BP recorded to­tal im­pair­ments of US$17.4 bil­lion, at the up­per end of its pre­vi­ous guid­ance.

“These head­line re­sults have been driven by another very chal­leng­ing quar­ter, but also by the de­lib­er­ate steps we have taken as we con­tinue to reimagine energy and rein­vent BP,” Looney said in a state­ment.

“In par­tic­u­lar, our re­set of long-term price as­sump­tions and the re­lated im­pair­ment and ex­plo­ration write­off charges had a ma­jor im­pact.”

The loss, based on BP’s cur­rent ac­count­ing def­i­ni­tion, is the first recorded on Refini­tiv Eikon data. Looney called it the “tough­est quar­ter in the in­dus­try’s his­tory.”

As the in­vest­ment cli­mate turns away from car­bon-in­ten­sive fos­sil fuel, Looney had planned to un­veil BP’s new strat­egy in September. In­stead, the com­pany an­nounced de­tails on Tues­day.

It said it would in­crease its low-car­bon spend­ing ten-fold by 2030 ver­sus cur­rent lev­els to US$5 bil­lion a year out of a to­tal budget of around US$15 bil­lion and boost its re­new­able power gen­er­a­tion to 50 gi­gawatts.

Over the same time frame, it plans to shrink its oil and gas pro­duc­tion by at least one mil­lion bar­rels of oil equiv­a­lent per day com­pared with 2019.

Italy’s Eni, which has also out­lined an am­bi­tious energy tran­si­tion plan, said ear­lier this year it will wind down its oil and gas pro­duc­tion start­ing 2025.

To hone its port­fo­lio, BP tar­gets di­vest­ments of US$25 bil­lion be­tween 2020 and 2025, around US$12 bil­lion of which are al­ready lined up.

It will re­tain its 19.75 per cent stake in Rus­sia’s Ros­neft, it said.

While oil and gas are dom­i­nant, Red­burn’s eq­uity an­a­lyst Stu­art Joyner said the strate­gic shift was en­cour­ag­ing.

“There will be in­evitable ques­tions over prof­itabil­ity of new low car­bon in­vest­ments,” he said. “But BP is now firmly leading the sec­tor in terms of tran­si­tion­ing its business to a lower car­bon fu­ture.”

BP, which paid out a to­tal of US$7.2 bil­lion in div­i­dends last year, be­came the largest div­i­dend payer on the Lon­don FTSE stock ex­change after Royal Dutch Shell cut its div­i­dend for the first time since the 1940 ear­lier this year.

BP last re­duced its div­i­dend in 2010, when it was sus­pended for three quar­ters following the deadly Deep­wa­ter Horizon rig ex­plo­sion.

It holds US$40.9 bil­lion in net debt after rais­ing US$19 bil­lion in new debt in the second quar­ter, more than any of its peers.

Its debt-to-eq­uity ra­tio, known as gear­ing, at 33.1 per cent ex­ceeds its own tar­get and places it at risk of a down­grade by rat­ing agen­cies.

BP said it aimed to “re­set a re­silient div­i­dend” of 5.25 cents per share per quar­ter and to return at least 60 per cent of fu­ture sur­plus cash as share buy­backs.

BP’s second-quar­ter un­der­ly­ing re­place­ment cost loss, the com­pany’s def­i­ni­tion of net in­come, reached US$6.7 bil­lion, roughly in line with fore­casts.

That com­pared with prof­its of US$2.8 bil­lion a year ear­lier and US$791 mil­lion in the first quar­ter of 2020.

Ex­clud­ing the im­pair­ment charges, the sharp drop in rev­enue from BP’s oil and gas pro­duc­tion and the worst re­fin­ing profit mar­gins in 15 years were off­set by an “ex­cep­tion­ally strong con­tri­bu­tion” by trading op­er­a­tions.

Sim­i­larly, Shell and To­tal’s re­sults were cush­ioned from the full force of the coro­n­avirus-in­duced de­mand col­lapse.

But U.S. ri­vals Exxon Mo­bil and Chevron, which have much smaller trading desks, suf­fered huge losses in the quar­ter.

BP said it ex­pects global de­mand to re­cover in the third quar­ter, “al­beit still sig­nif­i­cantly be­low last year’s lev­els.”


Bernard Looney

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