The future is delayed, not cancelled, said BP this week. “Nice line”, said the Guardian’s Nils Pratley, but the key question is how long will it be before an oil barrel costs $50-$60? That’s where it needs to be if BP is to keep up its pace of capital expenditure and dividend payouts. The oil giant unveiled another set of record profits – up 39% to $25.6bn in 2008, with sterling dividends increased by 40% – but the sting was in the fourth quarter, which saw a 24% profit decline. Throw in a $700bn tax charge at TNK, BP’s troubled Russian unit, and the result was the first quarterly loss in more than seven years.
This “has compounded a mounting sense of crisis in the oil industry”, said The Times’ Robin Pagnamenta. In response to plunging oil prices it has scrapped projects and shed thousands of employees. Historically, such action has “improved returns on invested capital”, said the FT’s Lex, “but has stored up problems; if you don’t spend the money, about six years later you start to see the consequences”.
What next?
Oil prices may not recover soon; Morgan Stanley reckons that weakening demand will drag prices down to $25 a barrel this spring. BP may thus soon face a choice between trimming the dividend and reducing capital expenditure. “Investors with long memories recall it remains the most recent oil major to cut its dividend, albeit back in the 1992 recession”, said The Times’s Ian King, and “quite simply, the market does not believe BP’s dividend is sustainable”.
BP: 499p; 12m change –10%