British Petroleum (BP)
BP plc (ADR) (NYSE:BP) was founded in 1909 as the Anglo-Persian Oil Company after a massive oil discovery in Iran. Today, BP employees over 80,000 people in around 80 countries.
BP’s strategy as outlined in its latest quarterly report is for low oil prices is to reorganize the business to:
“Our principal objective is to re-establish a balance in our financial framework by 2017 where operating cash flow covers capital expenditure and the current dividend at an average Brent oil price of around $60 per barrel.”
The company’s management is resolute in not cutting its dividend:
“This (the company’s strategy) supports our ongoing commitment to sustaining the dividend as the first priority within our financial framework, and restoring growth in distributions to shareholders over the long term.”
The last time BP cut its dividend was in 2010 due to the Gulf oil spill disaster. The company’s cash outflows for the spill are decreasing, and a settlement agreement has been reached in principle to settle all federal and state claims. BP is expecting cash outflows of around $1.6 billion in 2016 from the Gulf oil spill.
Like other oil companies, BP is reducing its expenses and minimizing growth capital expenditures to its best ventures. The company is expecting $17 to $19 billion in capital expenditures in 2016. The company paid $6.7 billion in dividends in fiscal 2015, and I expect the same number in 2016 (no increase, but no cut either). Dividends and capital expenditures combined with gulf oil spill costs brings the company’s capital needs to somewhere between $26 and $28 billion in fiscal 2016.
BP plc (ADR) (NYSE:BP) generated operating cash flows of $5.8 billion in its most recent quarter. If oil prices remain around the same levels they were over th3 4th quarter of 2015, the company will generate operating cash flows of around $23 billion in fiscal 2016 – around $3 to $5 billion short of what is required. Fortunately for shareholders, BP is planning to divest between $3 and $5 billion in assets in fiscal 2016 – shoring up the company’s capital needs.
BP’s balance sheet is flush with cash. The company has around $26 billion in cash on its balance sheet – enough for more than 3 years of dividends on its own. BP does carry around $53 billion in debt which is fairly high, but the company’s large cash position and positive operating cash flows offset its debt.
Investors in BP will likely continue receiving steady dividends until oil prices move past $60/barrel. When that occurs, BP will likely begin raising dividends. The company’s cost cutting moves and asset divestitures combined with its large cash position make it very likely investors will not experience a dividend cut from BP.
As of the end of September, 35 funds from the Insider Monkey database held around 1% of BP’s outstanding stock, including Bill and Melinda Gates Foundation Trust, billionaire Israel Englander’s Millennium Management, and Kahn Brothers.
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Total SA (ADR) (NYSE:TOT)
Total SA (ADR) (NYSE:TOT) was founded in 1924 when French Prime Minister Raymond Poincare opted to form an entirely French oil corporation instead of entering into a partnership with the British/Dutch Royal Dutch Shell Corporation.
The company was listed on the New York stock exchange in 1991 and has paid a dividend every year since. Total SA’s dividend does fluctuate in dollar terms because the company pays its dividend in Euros.
Total SA (ADR) (NYSE:TOT) is the 4th largest of the super majors, and currently offers investors a very high 6% dividend yield.
Like all oil companies, Total is seeing declining earnings due to falling oil prices. Despite this, Total SA’s dividend is safe.
The company is expecting earnings-per-share of:
– $3.60 in fiscal 2015
– $3.75 in fiscal 2016
The company currently pays $2.64 a share in dividends. Total’s payout ratio will remain well under 100%, despite low oil prices.
Total’s payout ratio in fiscal 2016 is expected to be around 75% of earnings. This is high, but it is by no means overly risky when one considers how far oil prices have fallen.
Total’s conservative payout policy is serving the company well. Total does carry a significant amount of debt on its balance sheet, however. The company currently has $56 billion in debt and pays $1.1 billion a year in interest.
Despite the large number ($56 billion sounds too high), Total SA is in no danger of a liquidity crunch. The company currently has an interest coverage ratio of 14.3x, making it safe overall.
What stands out about Total compared to its peers is its relatively low payout ratio (in comparison). There are few companies that can safely pay a 6% dividend yield. Total SA is one of them.
Investors will also benefit from the company’s growing production. Through the first 3 quarters of fiscal 2015, Total SA has increased its production by 11% versus last year.
A conservative fair value estimate of Total SA’s dividend yield when oil price fears are not high is around 4%. This implies around 50% upside for Total SA shareholders at current prices.
The company will very likely see its dividend yield fall – and its price rise – once oil prices increase. In the meantime, investors will benefit from the company’s high 6% yield and growing production.
Only 16 funds among those followed by Insider Monkey held shares of Total at the end of the third quarter of 2015. Among the company’s largest shareholders were Seminole Capital, International Value Advisors, and Millennium Management.
