With the current oil crisis dragging on far longer than initially anticipated, many big oil dividend stocks such as BP PLC (ADR) (NYSE:BP), Chevron Corporation (NYSE:CVX), and Royal Dutch Shell plc (ADR) (NYSE:RDS.A) are offering tantalizing high-yields.
However, given the capital intensive nature of this business, the cyclical nature of the industry, and the unpredictable nature of crude and natural gas prices, many income investors are understandably concerned about just how safe these big oil dividends are.
Let’s take a look at BP’s business model, balance sheet, risks, turnaround plans, dividend profile, and valuation to see why this is one oil giant that is probably best avoided for conservative investors living on dividends, except perhaps by the most risk tolerant dividend investors.
Business Description
Based in London, BP is one of the largest integrated oil and gas companies in the world with sales in excess of $225 billion last fiscal year. BP has three business segments: upstream oil & gas production, downstream (refining, lubricants, fuels, and petrochemicals), and its 19.75% stake in Rosneft, the Russian oil giant.
In the most recent quarter, BP was able to hold the line on total oil equivalent production of 2.26 million barrels per day, but lower oil prices resulted in much weaker year-over year profits. This left it up to the downstream business to do the lion’s share of generating actual replacement cost profits (profits after including cost of replacing inventories).
However, that segment was hit by falling refining margins due to too much supply of refined fuels and petrochemicals; courtesy of the epic supply glut the world is experiencing.
| Business Segment | Replacement Cost Profit | % of Profit |
| Upstream | $29 million | 2.1% |
| Downstream | $1.513 billion | 107.2% |
| Rosneft | $246 million | 17.4% |
| Corporate | -$376 million | -26.6% |
| Total | $1.412 billion | 100% |
Source: BP Q2 2016 earnings supplement
Business Analysis
BP, and its European cousin Shell, have long been behind their American cousins Exxon Mobil Corporation (NYSE:XOM) and Chevron when it comes to operating efficiencies. This means that their overall profitability is lower, putting them at a disadvantage when it comes to industry downturns. During these challenging times, maximizing cash flow and minimizing costs becomes imperative.
As seen below, BP scores the lowest marks of the group for each of the key profitability and efficiency metrics.
| Company | Operating Margin | Net Margin | Return On Assets | Return On Equity | Return On Invested Capital |
| BP | -3.1% | -2.7% | -1.9% | -5.3% | -3.12% |
| Royal Dutch Shell | -2.9% | -2.0% | -1.3% | -2.6% | -2.09% |
| Chevron | -2.3% | -0.6% | -0.3% | -0.5% | -0.39% |
| ExxonMobil | 5.5% | 4.5% | 3.1% | 6.1% | 5.11% |
| Industry Average | 0.7% | -1.4% | -0.9% | -2.0% | NA |
Source: Morningstar
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