BP halves dividend after $6.7bn Q2 loss on Covid crisis

BP's underlying replacement cost loss for the quarter, the energy giant's measure of net income, was $6.7bn compared with a profit of $2.8bn a year ago and and $791m in the first quarter of the fiscal year.

The loss, in line with analysts expectations, came as BP wrote off $6.5bn in the value of oil and gas exploration assets after a sharp revision in oil and gas price forecasts.

In a blow for pension funds and private investors who have seen a constant stream of cuts or cancellations, the oil giant on Tuesday declared a dividend of 5.25 cents a share, compared to 10.5 for the previous quarter as part of a new distribution policy.

Chief executive Bernard Looney said he acknowledged the impact of the cut on "on many - whether individual retail investors or large holders". The company committed to return at least 60% of surplus cash through share buybacks, "once BP's balance sheet has been deleveraged and subject to maintaining a strong investment grade credit rating".

The second quarter reported loss came in at $16.8bn, compared with a profit of $1.8bn a year earlier as the company wrote off $10.9bn, including $9.2bn in assets.

BP also said it would spend $5bn annually on low carbon investment 10-fold to around $5bn a year as it wanted to "pivot" to become an integrated energy company, increasing green power generation to 50 gigawatts and slashing oil and gas production by 40% compared with 2019.

"Global oil demand is expected to be around 8-9m barrels of oil per day lower than 2019, with OECD oil stocks above their five-year range, and gas markets are likely to remain materially oversupplied. There is also a risk of the pandemic having an enduring impact on the global economy, with the potential for weaker demand for energy for a sustained period," BP said.

BP said it expected oil and gas production to fall by at least one million barrels of oil equivalent a day, or 40%, from 2019 levels by 2030, adding it would stop exploring for oil and gas in new countries.

Rival Royal Dutch Shell last week posted second quarter losses of $18.3bn with a record write-down in asset values with $16.8bn in post-tax impairment costs.

A POST-OIL AND LOWER DIVIDEND FUTURE

Hargreaves Lansdown analyst Nicholas Hyett said the planned move to investment in a low carbon future was "likely to mean significant asset sales in the years to come and reductions in exploration and development budgets".

"It’s a massive change in direction from even a couple of years ago, and does rather suggest that BP feels there’s a real risk it’s left holding what are sometimes called stranded assets. BP won’t stop being an oil & gas company overnight, but the direction of travel is clear," he said.

Russ Mould, investment director at AJ Bell, said BP also faced a challenge to keep its debt levels under control.

"It is worth noting that the 50% reduction in the payout is a less aggressive move than that seen at peer Royal Dutch Shell in slashing its own dividend by two thirds earlier this year. Which of these was the right course of action in the long run remains to be seen, given the short-term pressures and long-term challenges facing big oil companies amid volatile oil prices and a transition away from polluting fossil fuels," he said.

Richard Hunter of interactive investor said a positive response from investors on the shares in Tuesday trade reflected steps taken to bolster the balance sheet and moved to diversified energy sources.

"From an investment perspective and even after the reduction of the dividend, the implied yield remains around 6%, which is particularly punchy in the current interest rate environment," he said.

"Certainly, when set against any number of blue chips who have decided to defer or cancel their own payments, the yield is particularly attractive to income-starved investors, while BP’s new buyback strategy to return 60% of surplus cash provides extra flexibility."

The road ahead may well be treacherous, but BP is transforming those parts of the business within its control. As such, the market consensus of the shares as a buy shows optimism in its ability to maintain relevance in what could be a new energy order.”