Fears growing that oil giant BP will cut its dividend

Fears are growing that BP will cut its dividend after warning that it will take a one-off hit of up to £14billion. 

The energy supermajor – whose dividend is a vital source of income for pensions and other investments – has made sweeping write-downs after slashing its forecasts for oil prices and ditching plans to develop a series of oilfields. 

The shift reflects the FTSE100 company’s belief that the coronavirus crisis will have a permanent effect on the global economy and oil demand – and will lead to a move away from fossil fuels towards greener energy. 

The impact of the charges on its second-quarter results could push the oil major to a record loss – outstripping its £14bn swing into the red in 2010 following the Deepwater Horizon oil spill. 

Analysts warned the announcement could be a way of ‘softening the blow’ for an imminent cut to the prize dividend, which has been a lifeline for investors and savers who are relying on shareholder payouts more than ever amid roller-coaster stock markets. 

Only a week ago, the 111-yearold oil buisness announced it would lay off around 15 per cent of its global workforce – 10,000 out of some 70,000 staff. 

Boss Bernard Looney, who took over from Bob Dudley in February, said much of the cuts would fall on senior managers. He was already planning to restructure the company and refocus on a green agenda, but this has been accelerated by the coronavirus crisis. 

Looney, 49, is expected to unveil a detailed roadmap for BP’s future in September. BP said it has ‘a growing expectation that the aftermath of the pandemic will accelerate the pace of transition to a lower carbon economy and energy system’, adding that countries will ‘seek to ‘build back better’ so that their economies will be more resilient in the future’. 

Around half of the second-quarter charges will come from writing off most of the value of undeveloped projects – into which it had already sunk billions of pounds. It has large pre-production sites in the US Gulf of Mexico, Canada and Brazil. 

The other half will come from BP lowering the value of its existing assets after it reduced its estimate for oil prices between 2021 and 2050 to $55 a barrel, down from $70 a barrel previously. 

Oil prices started the year at $68 a barrel but plunged to a low of $19 in April as the coronavirus pandemic brought travel and industry in much of the world to a standstill. Brent crude is now trading at around $37. Some major institutional investors have long argued that oil majors’ use of overly optimistic long-term oil price assumptions has led them to overestimate their ability to pay out hefty dividends. 

Michael Hewson, chief market analyst at CMC Markets, said: ‘Having seen Shell bite the bullet and cut its dividend a few weeks ago, it would appear that BP is likely to have to follow suit, if it wants to reduce its already high debt levels and shore up its balance sheet.’ 

In April, BP handed savers and pensioners a lifeline by promising to pay a £1.7billion dividend for the first quarter, despite profits slumping by two-thirds. 

The energy giant committed to handing investors 10.5 cents a share – up from 10.25 cents in the first quarter of 2019. 

But days later its commitment to the first-quarter payout was thrown into sharp contrast with rival Shell, which slashed its dividend for the first time since the Second World War. Helal Miah, investment research analyst at The Share Centre, said the announcement ‘may be the management’s way of softening the blow and leading us to expect a cut in the dividend when they publish the second-quarter results in early August’. 

Russ Mould, investment director at AJ Bell, said: ‘By laying bare the impact of the oil price crash on the business, slashing its oil price assumptions and taking tens of billions of dollars’ worth of write-downs, it is probably hoping any decision on the dividend will be seen in a more sympathetic light.’ 

Shares fell 2.2 per cent, or 7.05p, to 316p.