LONDON (Reuters Breakingviews) - Bernard Looney’s new job is already hard. BP’s incoming chief executive, who takes over next year, faces a dilemma over how to balance fossil fuels with a lower-carbon world. Third-quarter results on the surface complicate things further, but there’s a silver lining.
BP’s results were a bit of a mess. The group had to swallow a $3.3 billion writedown on the mainly U.S. assets it sold to help finance a $10.5 billion shale deal last year. That, plus a 20% drop in achieved oil and gas prices compared to the third quarter of 2018 saw a 40% year-on-year dip in net profit. The hit to equity from the writedown and a 21% jump in net debt means gearing is now 31.7%, above BP’s 20% to 30% comfort zone.
Still, BP’s call to exit Alaska in favour of markets which are cheaper and have a shorter production cycle, like the Permian Basin, is sound. BP is three-quarters of its way through a $10 billion disposal programme, which should help return gearing nearer 25% next year, and the group generated the same $6 billion of cash as the third quarter of 2018. Meanwhile, Looney has a trump card.
BP is currently likely to pay shareholders $8.3 billion in 2020, Citi analysts reckon. Factoring in cash generated by its refining arm, it’s distributing 21% of the cash flow from its exploration and production division. That’s lower than the 27% and 31% likely in dividends and buybacks from France’s Total and Exxon Mobil. And it’s a lot lower than the 43% and 56% from Chevron and Royal Dutch Shell. Even if BP just paid out around the average level of its peers, it could afford to hand over another $2 billion – a 20% hike to its current dividend.
The obvious reason for Looney to avoid doing this would be if BP was underinvesting relative to peers. But it isn’t. Shell’s dividend and buyback are 1.5 times its upstream capital expenditure, as forecast for 2020 by Citi. BP’s is only 60%.
The good news for Looney is that investors don’t yet appear to be factoring all this in. The yield on BP’s forecast dividend for 2019 is 6.4%, versus Shell’s at 6.1%. If BP’s decision to suspend its payout in shares indicates future generosity, the shares will look even cheaper.
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