BP Plc (ADR) (BP): Dividend Cut Unlikely In The Short Run

A short run cut is unlikely

While BP’s dividend isn’t sustainable in the long run, we don’t think BP will cut its dividend anytime soon. A dividend cut would be deeply unpopular with shareholders, many who depend on BP’s dividend checks for a substantial part of their income. BP has plenty of liquidity to wait for the crude recovery, which historically has taken up to 2 years after the initial steep declines to realize. We think management will postpone the dividend cut until the last possible moment.

Helping sustain the dividend is BP’s downstream business. Downstream is what is keeping BP profitable. BP’s downstream unit made $1.9 billion in underlying pre-tax replacement cost profits in Q2 and $2.2 billion in pre-tax profits in Q1. Downstream refiners are raking it in because gasoline and other refined product prices have not fallen as much as crude prices have, and a big part of that difference is going directly to their bottom lines. Many investors believe that downstream margins will stay healthy as long as Saudi Arabia continues manipulating the price of crude lower and global economic activity remains above sea-level.

Sell non-core assets to cover the dividend

We think management will sell non-core assets and eschew acquisitions to defend the dividend. There has been a substantial amount of M&A in the oil and gas sector. Schlumberger bought Cameron International for $14.8 billion in cash and stock. Shell bought BG Group for $70 billion. Halliburton bought/merged with Baker Hughes. Although Brent is below $50 and WTI is below $45, the demand for energy assets is healthy and BP could raise substantial sums by selling its non-core assets.

Dividend cut or not, we like BP plc (ADR) (NYSE:BP) shares. BP is a good long term holding because crude prices can’t stay low forever. The Middle East can’t run on $50 Brent for long. Sooner or later, OPEC will cut production and BP will be around to benefit.

Disclosure: None