BP has defended its decision to maintain its dividend by taking on more debt. Chief executive Bernard Looney justified the decision, which has been questioned after the oil major fell to a $628 million loss over the first quarter of 2020, by telling critics to remember that many shareholders were pensioners and savers, not just “faceless institutions”.
“A lot of people think that investors are somehow nameless, faceless institutions. A lot of them are savers and pensioners, people who are worst affected at the moment. These are real people with real dependencies.”
The dividend has been held at 10.5 cents a share and BP’s annual bill for the payout comes in at over $8 billion a year. Of all the companies listed on the London Stock Exchange, only oil and gas major peer Royal Dutch Shell pays out more in dividends than BP. However, it remains to be seen if the company will maintain dividends into the second quarter of the year with Mr Looney stating:
“The second-quarter decision will be taken based on the underlying business performance, the outlook for the financial framework and the environment at that time.”
BP has also said it will not initiate redundancies over the next three months but is likely to be forced into doing so later in the year unless oil prices take the kind of drastic turn for the better that doesn’t currently look realist. However, the chief executive pushed back against suggestions that maintaining dividend payments for the first quarter could be considered irresponsible if jobs are subsequently lost:
“We haven’t laid off any staff in the first quarter as a result of Covid and we have made a decision on the dividend in the first quarter to pay it, so right now there is no inconsistency.”
A combination of a glut in oil supply after Saudi Arabia ramped up production following a disagreement with Russia on proposed production cuts and a steep drop in demand due to the Covid-19 pandemic, has seen oil prices plunge to around $20 a barrel. However, the quarter’s losses were generated at an average price of $50 a barrel over the three months of the first quarter.
BP needs an average selling price of $56 a barrel to break even on its current spending and dividend payment. While the company is trying to cut costs, there will be concerns how significant 2nd quarter losses could be if oil prices remain at or around current levels for any length of time.
One positive was, however, that after a one-off charge for $1.4 billion was stripped out, underlying profits came in ahead of analyst estimates for $710 million, at $791 million. That figure was still a two thirds drop on underlying profits over the same period a year ago.
Capital spending is to be cut by $3 billion this year and cash costs reduced by $2.5 billion by the end of next year. New debt facilities have also been secured with BP issuing $7 billion of bonds this month. The company hopes the combined effect of these measures will bring its break even level down to $35 a barrel by next year.
That may be necessary, as Mr Looney intimated with the statement:
“Nobody knows what the price of oil is going to be in the future. Nobody has seen anything like this before.”