BP's Love of Dividends Is Bordering on the Absurd

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(Bloomberg Opinion) -- It’s no secret that the U.K. oil majors BP Plc and Royal Dutch Shell Plc will do everything to avoid cutting their dividends, but the lengths to which BP is going to leave its payout untouched by the Covid-19 crisis border on the absurd. When Brent crude is at $20 per barrel and BP’s dividend stays firm, the company’s management gives the impression of living in fear of investors.

BP’s revenue fell sharply during the first quarter as the pandemic curbed industrial demand for oil and chemicals, lockdowns cut transport and a Saudi Arabia-led price war exacerbated the impact on oil prices. Operating cash flow was $1 billion, compared with $7.6 billion in the final three months of 2019.

In response to the crisis, the company is saying the right things about strengthening its finances. It is amassing cash from anyone who will lend it, raising $7 billion in the bond markets and obtaining a $10 billion credit facility. It’s cutting capital expenditure this year by 25% and it will reduce operating costs by about $2.5 billion by the end of 2021.

There’s only so much BP can cut, however, so its net debt has shot up and the company is now saying its overall leverage, measured as net debt to total capital, will be above its 20%-30% target range into 2021.

And yet, the quarterly dividend stayed at 10.5 cents per share, after being raised last quarter, implying a total payout for the three months of $2.1 billion. While dividends are meant to be discretionary, BP’s have taken on an unshakable status. Every operating measure and financial target appears to work around them, even as the oil giant talks about the need to strengthen its balance sheet.

Chief Executive Officer Bernard Looney’s defense is that the payout was reviewed by the whole board and is supported by the “underlying performance” of the business. Yet even when adjusting for working-capital movements, squeezing the dividend plus a quarterly capital-spending bill of about $3 billion out of operating cash flow is going to be tight this year.

How does this support the big strategic challenge facing BP: the need to invest in the energy transition? Looney is promising more details on BP’s green plans later in the year. For now, it’s hard to be optimistic.

The company’s renewed cost-cutting zeal means it can break even at low crude prices, though not as low as today. As the oil industry finds ways to produce more efficiently, that just makes it harder for cleaner energy sources to be competitive. Meanwhile, the financial resources needed to invest in the transition away from hydrocarbons are being rationed. They’re mainly being paid out to BP investors. The only silver lining will be if those same shareholders reinvest the cash on renewables companies in a better way than BP would spend it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2020 Bloomberg L.P.

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