Here’s some bad (but not entirely surprising) news for investors in BP: its dividend might be about to go on a summer sabbatical.
Goldman Sachs thinks the payments, which account for around 12 per cent of the income generated by the FTST All share index, are about to be suspended for two quarters before being lowered to 10 cents a quarter.
(To put that figure in perspective, BP has paid 14 cent for the past eight or so quarters).
Interestingly, Goldman doesn’t cite politics as the reason for the dividend cut and holiday, but BP’s ability to pay for the spill at the Macondo well (which ironically shares a name with the doomed town in Gabriel García Márquez’s One Hundred Years of Solitude).
We estimate the GoM spill might cost BP c.US$33 bn on a post tax basis. This might represent total clean-up and legal costs and might not fully materialize for a decade. Exhibit 3 shows our estimates of BP’s balance sheet headroom to pay for damages by end-2011, at different oil prices and gearing ratios, assuming it continues to pay its dividend of US$10.6 bn pa.
Our analysis implies that at a US$80/bl oil price, assuming maximum gearing of 40%, BP would have balance sheet headroom to meet US$11 bn of post-tax damages. On this basis, payment of greater damages might require a dividend cut / holiday or a rights issue. Consequently, we assume BP will take a holiday on the dividend payment in 2Q and 3Q, while uncertainties over damages are likely to very high, and will resume payments in 4Q at a reduced quarterly rate of US$10c.
See the chart below for details (click to enlarge):
All of which sees Goldman downgrade its rating on BP to “neutral” from “buy” and advise clients to switch into either Royal Dutch Shell or Statoil where there is better value.
And while there’s no reason to argue with that – Shell and Statoil aren’t as exposed to the Gulf of Mexico as BP – we can’t help feeling that analysts turning bearish on BP might be a bullish sign. After all, the number crunchers have been arguing for weeks and weeks that the fall in the BP share price was a gross overreaction to the likely costs, and yet the price kept falling:
That said, the well is still leaking and until it stops (or all the oil is captured) it’s a brave person that buys BP. And after that, the longer term implications of the spill (such as BP’s ability to do business in the US) have to be considered
Back to Goldman:
Exhibit 8 shows that BP is the most exposed company globally to major new assets in the GoM, with 12% of its market cap in the NPV of its Top 280 GoM fields, vs. less than 4% for all the other European oil companies. In our view, this is another reason to believe that BP will be more affected than other stocks by development delays in the Gulf. Exhibit 9 shows deepwater exposure. However, we do not believe that other deepwater basins will face similar delays/regulator scrutiny as the GoM.
Here is Exhibit 8. It’s not pretty for BP investors…
Related links:
BP’s share price woes highlight system’s shortcomings – FT
BP claims first success against Gulf spill – FT