BP (BP): How Will the Oil Catastrophe Affect Dividends?

A major oil spill in the Gulf of Mexico has seen BP lose $30 billion in market cap in the last few days. What does this mean for the stock and the dividend?

After the mammoth oil spill that occurred in the Gulf of Mexico, British oil giant BP (BP) has come in for huge public and market backlash. The once sturdy, reliable and reputable oil major, a keen payer of dividends, has seen $30 billion wiped off its market capitalization. So what does this mean for the dividend?
First a little about BP (BP): The company is an international oil and gas company, operating in more than 80 countries, providing its customers with fuel for transportation, energy for heat and light, retail services and petrochemicals products. Upstream activities include oil and natural gas exploration, field development and production, while Midstream activities include pipeline, transportation and processing activities related to its upstream activities. Marketing and trading activities include the marketing and trading of natural gas, including liquefied natural gas, together with power and natural gas liquids.
Given the recent drop in market price, BP (BP) is trading on a 6.59% dividend yield. This is twice as high as competitors ExxonMobil (XOM) and Chevron (CVX). The decline in BP’s (BP) stock price of about 22% since the oil spill occurred has seen it into a level of relative attractiveness. Aside from the dividend yield which is now twice that of rivals, the company is on a PE ratio of 8 times (38% below the industry average), and a price to sales of 0.59. The price to cash flow is about 4.8 times which is also under the industry average by quite some way.
Despite ups and down in the oil price over the last five years, BP’s (BP) dividend has increased 12% per annum. The latest quarterly dividend was for $0.14, for an annual total of $0.56 per share in 2009 (same as 2008).
So the question is what are the financial and reputational costs from this big oil spill? Reputation wise, BP (BP) is seen as one of the greenest oil companies in the world. In my view I think it’s unlikely anyone will stop buying oil from BP (BP) on a significant enough scale to cause a dent. As such, the risk to the dividend really lies in the financial and legal consequences of the spill.
The Wall Street Journal had an article recently which tried to quantify the potential damage. There are two key points:
“Until now the most costly oil spill was that of the Exxon Valdez. In total, Exxon had to pay about $4.3 billion in clean-up costs, fines and compensation. A lot of that money was paid 20 or so years ago, soon after the disaster. Counting inflation, the bill would be closer to $7 billion in today's money. The amount wiped off BP's market value in this crisis is more than four times as much.”
“The 1990 Oil Pollution Act, passed soon after Exxon Valdez, might cap some claims against BP–but experts warn it has plenty of loopholes, and doesn't cover the biggest ticket item, which will be cleaning up the mess.
BP may not carry the liability alone anyway. Oil service companies Transocean, Halliburton and Cameron International, which were all involved in the well, may be on the hook too.”
As the article and my own analysis concludes, BP is likely cheap at current prices. The company will face a large liability claim from various parties for the spill, but even if the dividend is halved, the yield is still in line with peers. It could be a compelling dividend play with an added capital appreciation incentive.
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