BP shares welcome Dudley’s final flourish but new boss has much to do

BP boss Bob Dudley steps down as the twelfth-longest serving CEO among the current crop of FTSE 100 bosses and investors appear to be giving him a warm send-off, as a share price rise welcomes the eighth increase in the quarterly dividend since he replaced Tony Hayward in autumn 2010. That hike in the dividend to 10.50cents ($0.1050) a quarter is testament to how far BP has come during Mr Dudley’s tenure, especially as free cash flow covered $8.5 billion of dividends and buybacks in the year, despite the weak oil price.

Source: Company accounts

And while he will be disappointed with BP’s share price performance during his nine-plus years as the oil major’s CEO, Mr Dudley will be able to look back and argue that he got three important things right.

1. He increased the company’s focus on safety and worked to improve BP’s reputation in the wake of the Gulf of Mexico disaster.
2. He forecast that oil prices would be ‘lower for longer’ and targeted BP’s cost base.
3. He began to slowly increase the company’s reserves of oil and gas, which are now higher than they were when he took over.

It was that combination which helped BP to rebuild its dividend and helped its shareholders in their quest for income and a low-yield world.

Source: Refinitiv data. Bob Dudley took over at BP on 1 October 2010. **Includes dividend reinvestment. Based on closing prices on Monday 3 February 2020.

Nevertheless, the shares’ overall poor performance (and BP’s underperformance of the FTSE 100, even on a total returns basis) means that Mr Dudley’s successor, Bernard Looney, still has much work to do, on three fronts in particular:

• Cash flow cover for the dividend is still skinner than ideal, at 1.6 times in 2019, and the latest bout of oil and gas price weakness (thanks at least in part to the Coronavirus and reduced Chinese consumption) means that BP will have to keep as close an eye on cost and capital investment as ever.

Source: Company accounts

• Net debt has soared during Mr Dudley’s tenure from $26.8 billion in 2010 to $45.3 billion at the end of 2019, despite cuts in capital investment and asset disposals. BP has therefore at least partially funded its dividends and share buybacks by taking on debt, which is not sustainable in the long term and leaves the company exposed to the risk of a sustained drop in the oil price. That would pressure cash flows and potentially force the company to choose between capital investment in new projects, any work to reposition its portfolio toward alternative fuel sources and the extent of dividend payments and buybacks.

Source: Company accounts. Excludes pension liabilities and leases.

• BP needs to show how it can fit in with Paris Agreement and the target of a carbon-neutral world by 2050. Mr Dudley’s focus on getting the company out of intensive care after April 2010’s Deepwater Horizon accident meant that his attentions were elsewhere but the world has moved on a lot in the past decade and shareholders are increasingly aware of environmental, social and governance (ESG) issues – thanks in part to disasters such as Macondo in the Gulf of Mexico. Mr Looney must accept that fund flows are running strongly against hydrocarbon produces and in favour of developers and providers of alternative and renewable sources of energy. It may be that his progress here has a greater influence upon BP’s share price than anything else.

As today’s results statement makes clear, BP is already investing in biofuels, biopower, solar energy (Lightsource) and wind energy, where it has over 1,000mW of generating capacity in the USA. However, all of these numbers pale compared to BP’s hydrocarbon output, which runs at 2.6 million barrels of oil a day equivalent, even excluding its stake in Russia’s Rosneft.

In fact, BP is committed to adding to its reserves and production from five projects that are already underway – Alligin and Culzean in the North Sea, Angelin in Trinidad, Constellation in the Gulf of Mexico and the West Nile Delta in Egypt – with more than 20 further projects scheduled for construction and launch in the coming years.

Investors in BP who warm to the yield on offer – and BP is forecast to the third-largest dividend payer in the FTSE 100 in 2020 – will therefore have to balance their desire for dividends with their own views on ESG issues and the requirements of the 2050 Paris Accord. That is a decision that they can only make for themselves as the gauge the potential reward posed by those dividends against the risk that a global move away from hydrocarbons leaves BP sat on a collection of stranded assets whose value is less than the $101 billion book value currently ascribed to them in the company’s accounts.

BP swallowed $6.9 billion in asset value impairment costs in 2019, relating mainly to assets in the US and Egypt, and there could be more to come if oil and gas prices remain weak or the world embarks upon a (still seemingly unlikely) rapid shift away from fossil fuels. Investors will therefore want to keep an eye on how BP’s net asset value develops over time, especially since it has failed to grow since 2010, remaining stuck at around that $101 billion mark.

Source: Company accounts

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