oil

Oil and gas companies have had a tough time in the last two years with the FTSE350 Oil and Gas producers’ index plunging from levels of 8,870 in late 2014 to 12 year lows of 4,915 earlier this year.

Not surprisingly the decline in oil and natural gas prices has been the catalyst behind these sharp drops with crude oil prices falling to levels last seen at the end of 2003.

Even natural gas prices, which traditionally do well in the winter months, have struggled to show any inclination to rally particularly strongly, also down 45% since the end of 2014.

This morning’s results from BP have added to the gloom surrounding the sector after the company announced a Q4 loss of $3.3bn with underlying profits sliding to $91m. While the dividend has been maintained the question now is whether it will continue to be so given that energy prices still show no signs of finding a base.  

As it stands BP had already announced 4,000 job losses earlier this year, with 600 in the North Sea as well as further capital expenditure cuts in an attempt to ride out the storm, but there is a worry that with a dividend yield of 7.3% and a dividend cover of 0.5 it could be susceptible to a cut in the coming months, particularly given how bad this morning’s results are.

These sorts of concerns also help explain why the share price has come under pressure, but it is notable that despite the sharp fall in the oil price the shares haven’t hit the lows seen in the wake of the 2010 Deepwater Horizon oil spill at around 296p, and the reason for this is probably down to the fact that for now the dividend remains intact.

BP CEO Bob Dudley will be particularly keen to ensure that the dividend remains untouched having finally restored it in the wake of the Gulf of Mexico disaster, having made the company much leaner since taking over the reins, but with average oil prices still trading at multi year lows so far this year the question now needs to be asked in how long can BP sustain the dividend at current levels, without an imminent pick up in oil prices.

How many more jobs will BP need to cut from its already reduced 80,000 workforce in the coming months in order to sustain its payout against a backdrop of a possible ratings downgrade, and lower energy prices for longer?

If BP management insist that the dividend is safe how much worse do things need to get before it becomes unavoidable as BP management weigh up the likely response in terms of the share price response if they did cut the payout. Any payout cut could well be ugly, particularly if it wipes a few more billion off the share price, and potentially do more harm than good,.

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