BP Earnings Collapse: Is a Dividend Cut Imminent?

It’s no secret that oil companies are getting punished in this low-price climate, and BP PLC (NYSE: BP) is no exception. BP reported fourth-quarter and full-year results on Tuesday morning, and the stock promptly crashed 8%.
BP’s results were even worse than expected. The company racked up a massive loss last year, despite the fact that it’s cutting spending and selling off assets. Investors are worried that even one of Big Oil’s biggest companies can’t keep its head above water in this environment.
All eyes are now on the sustainability of BP’s dividend, which is certainly in question.

BP Earnings Disaster

BP’s fourth-quarter earnings collapsed 91% year-over-year. Adjusted profit, which excludes non-recurring items and inventory charges, totaled $196 million for the quarter. That missed analyst expectations, which called for $814 million. BP lost a whopping $6.5 billion for the full year.
BP’s adjusted earnings have now declined on a year-over-year basis for six consecutive quarters. Even worse, its loss last year was its largest in the last 20 years.
Not surprisingly, the biggest weakness was BP’s upstream business. That is where exploration and production activities take place. The upstream operations are reliant on a supportive commodity price, and with Brent crude barely above $30, BP lost $700 million from upstream in the fourth quarter. This was a complete reversal of the $2.2 billion profit in the year-earlier quarter.
Fortunately, as an integrated major, BP also has a large downstream business. Downstream activities include refining, which is actually improving in this climate. Refiners do better in an environment of declining oil prices. Over the past year, many oil refiners have seen improved profits as the price of oil collapsed. The reason: As oil falls, so do refining feedstock costs. This expands refiners’ spreads and profit margins.
The result is that low oil prices are actually a strong tailwind, and BP earned $7.5 billion in downstream profits last year, a record for the company. The bad news is that BP’s downstream business isn’t nearly large enough to offset the losses being racked up in its upstream business.
Separately, BP earned a $235 million profit from its investment in Russian energy producer Rosneft.

What About the BP Dividend?

The short answer is no. BP has pledged to maintain its dividend throughout the downturn in oil prices, with management reiterating several times that the dividend is the top priority in the company’s financial framework. That’s all well and good, but investors have seen many companies cut their dividends in the energy sector, even after management teams promised they would not.
At the heart of the question is whether BP can sustain its dividend, and how far it’s willing to go to do so. BP isn’t earning enough profits from its operations to pay its dividend.
It has already sold off billions of dollars’ worth of assets, including $10 billion of assets since October 2013, and it plans another $3 billion to $5 billion in divestments this year.
Plus, BP is cutting spending to the bone. It has slashed thousands of jobs and canceled projects as part of a $3.4 billion cost-cutting initiative last year. BP plans to cut spending by another $7 billion this year.
To be sure, BP once again maintained its quarterly dividend. However, how long that can last depends on what the company does moving forward. Keep in mind that BP also has approximately $1 billion per year in financial penalties as a result of its settlement with the U.S. over the Gulf of Mexico oil spill. The takeaway from all this: BP’s financial position is stretched, to say the least.
Therefore, investors looking at BP and its 8% dividend yield need to be aware of the significant possibility that the dividend will be cut if oil does not recover this year.
DISCLOSURE: Bob Ciura personally owns shares of BP PLC (NYSE: BP).