Safe for now | FT Alphaville

Safe for now


Compared to the same period last year, BP’s reported daily production jumped 4 per cent to more than 4 million barrels of oil equivalent in the three months to end-June. Also, the $2 billion reduction in cash costs targeted for 2009 as a whole has already been exceeded and a further $1 billion saving is expected over the remainder of the year, the company said today.

So begins the press release accompanying BP’s second quarter results. But are we alone in thinking it’s somewhat sad that a company of BP’s size and stature has to make so much of its efficiency drive?

That BP is keen to demonstrate its cost cutting abilities is not surprising and other big oil companies will do the same as they report over the next couple of weeks. After all, they can’ t fund both their exploration activities and maintain dividends with slashing costs and jobs, as Neil McMahon of Sanford C. Bernstein has recently noted.

Our analysis shows that given the recent cost climate present day commodity price levels simply do not allow the Majors to continue to grow the business and pay substantial shareholder returns, and therefore this quarter looks set to be a competition of who can cut costs the best, with many of the Majors having tabled cost cutting programs at the start of the year. Hence those wishing to stand any chance of paying healthy dividends and supporting production growth through exploration (or acquisition) will need to be publishing strong progress on cost efficiency programs in Q2.

And so on the back of today’s cost cutting news, BP has indeed maintained its dividend at 14 cents a share (although in sterling terms that’s a rather impressive 21% rise year-on-year).

But how much longer can BP keep this up? McManon calculates that for BP to maintain its shareholder distribution strategies and sustain modest production growth it would require a blended oil and gas price in excess of $80 a barrel.

However, BP chief executive Tony Hayward is not seeing any green shoots at the moment.

The overall picture is of energy demand now stabilising following significant falls in the first half of the year. We see little evidence of any growth in demand and expect the recovery to be long and drawn out.

And a prospective yield of 6.8% really does feels too high for a dividend that is safe. This is a company that is having to run very fast just to stand still.
Related link:
Big oil’s dividend conundrum – FT Alphaville