In the third quarter, BP's capital expenditures (capex) totaled $4.4 billion, and asset sales during the quarter totaled $208 million. To find the cash available to finance the dividend, we subtract the operating cash flow ($5.2b) by the capex ($4.4b) and add the proceeds from asset sales ($208m). This results in $1 billion available to finance the quarterly dividend. BP's quarterly dividend approximates $1.7 billion each quarter. Uh oh! $1 billion - $1.7 billion = -$0.7 billion! That doesn't look good for us as investors. BP is having trouble generating enough cash to sustain its dividend.
That's all in the past though. Let's look forward. BP plans to limit capex to between $17 billion an $19 billion annually, or $4.25 billion to $4.75 billion a quarter. Asset sales are projected to total $3 billion to $5 billion in 2016, or $0.75 billion to $1.25 billion a quarter (asset sales are projected to decrease to $2 billion to $3 billion after 2016). With the $1.7 billion quarterly dividend, BP will need to generate about $5 billion in quarterly operating cash flow to sustain the dividend in 2016. Based on the decrease in oil prices, which directly affects BP's operating cash flow, BP will have to fire on all cylinders to meet this number.
There are multiple other moving parts to the operating cash flow number. For one, BP is increasing production in some segments; however, oil prices are drastically decreasing the yield per a unit produced. The elevated stress in the oil industry does not come without its benefits, though. BP has been able to substantially decrease its cost of production due to the lowered demand for production services in the industry. While this won't help the lower yield of production, it will help BP's operating income through lowered cost and, therefore, higher profit.
When BP can't sustain its dividend organically, it has to rely on a dividend cut or an increase in debt to fund the dividend. BP reached its projected maximum gearing of 20% during the previous quarter. While the concept of gearing may warrant a complex discussion, generally speaking, this means that BP has reached the maximum level of debt that it intends to take on. However, the following excerpt was taken from BP's third quarter conference call:
"At the end of the third quarter, gearing stands at 20%, including the impact of the Consent Decree and agreements with the Gulf States. This compares to the 10% to 20% target boundary we established in 2010 to allow greater flexibility for uncertainties, of which Deepwater Horizon was the most significant. As mentioned, with the recent filings in the United States, we have moved a step closer to finalizing these agreements, which provide for payments over an extended period. With that context, we will manage gearing going forward, allowing some flexibility around a 20% level while volatile market conditions remain."In summary, BP will waiver a bit on its 20% maximum gearing. This will help to sustain the dividend while BP's operations are in a stressed state; however, it's not exactly a good sign that management is proposing to take on more debt due to the current stressed state of the oil industry. BP's management indicated that they expect to be able to support the dividend without extra leverage by 2017 if oil prices increase to $60. From there, operating cash flow will continue to grow and allow for increases in the dividend.
Current estimates of oil prices in 2016 include decreases to the $20's and increases to the $60's. Who is right and who is wrong? Who is biased and who isn't? Who can tell the future? Not I. I'll wait for further developments to confirm what the appropriate action is for my energy positions. Until then, Common Cents feels that BP should be Held until further clarity exists on the direction of oil prices.
Common Sense Take: BP will struggle to maintain its dividend through 2016 if oil prices remain deflated, but BP has created some wiggle room for that year. If oil prices do not increase to the $60 level by late 2016 or 2017, BP will likely have to reduce its dividend. The trajectory of oil prices is unclear at the current time; therefore, a wait-and-see approach is warranted.
October 27profit in the third quarter was $1.8 billion, down 40% on the same period a year ago and 39% higher than the second quarter of 2015Operating cash flow was 5.2 billionContinuing to take costs out of the system2.6 billion divestment in first 9 months, 3-5 divest in 16, 2-3 thereafter, new assets have a mid teens to 20 return at oil price of 60
1.1 billion fcf first nine months
Brent oil has averaged around $50 per barrel this quarter, down from $62 a barrel in the second quarter. Although global demand has been stronger and U.S. production has begun to decline, OPEC production is running higher than the 2014 average and inventories continue to increase. As we have mentioned before, there is also the prospect of Iranian production coming onto the market in 2016. Saw sustained lower oil prices early last year, have been adjusting since
Around 80% of investments break even below $60, expect to move lower as costs decrease, reduction of 15% over the last year
we expect to rebalance organic sources and uses of cash by 2017 at an average Brent oil price of around $60 per barrel. Organic free cash flow is expected to grow thereafter at constant prices. This underpins our ongoing commitment to sustaining the dividend as the first priority within our financial framework and restoring growth in distributions to shareholders over the long term
In this environment and based on our planning assumptions, we would expect free cash flow growth from 2018 restoring our capacity to grow distributions to shareholders
at gearing of 20%, using debt to sustain dividend
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