Analysis: BP stuck by investors and paid a dividend but how long can it continue?

BP held the line against the hoarde of dividend cutters on Tuesday but the payout has prompted concern over how long it can carry on dishing out the cash.

While banks and insurers have suspended dividends despite being in rude financial health, the backdrop for oilers like BP could not be worse as coronavirus leaves Brent Crude flirting with $19 a barrel.

Dishing out a £1.7 billion dividend could be seen as a sign of financial strength but look under the bonnet and BP’s new chief Bernard Looney - only 10 weeks in the role - is taking some stretching actions to meet the payment.

Analysts who dialled into BP’s investor call on Tuesday pressed Looney and his team about plans to tweak debt and investment levels to free up more cash.

Both of these are moving in the opposite directions - debt is rising and investment is falling - seemingly to help see off the oil price slide and preserve the $8.4 billion needed to meet dividends this year.

BP’s net debt rose to $51.4 billion in the first quarter, up about $6 billion from last year, increasing the level of debt-to-equity (known as gearing) to 36%.

That is the highest level in the oil sector according to RBC and well above the company’s 20% to 30% target range.

Exane BNP Paribas head of oil and gas research Lucas Herrmann asked Looney on Tuesday to explain the “logical” of borrowing at 4% to meet a pay out of 11% but no answer was forthcoming.

On the spending front, Morgan Stanley’s Martijn Rats also calculated that BP is spending $1.40 on capital expenditure for every $1 it hands out in dividends.

This is the lowest ratio since 1984, and even lower than other downturns when the capex ratio never fell below $2 for every $1 in dividends.