We are in the thick of the Q4 earnings season, with 251 S&P 500 members having reported so far. Up until now, the energy sector has witnessed year-over-year earnings growth of 146% in the fourth quarter, courtesy of a partial recovery in crude prices. Leading oil players like Chevron (CVX - Free Report) , ConocoPhillips (COP - Free Report) and Pioneer Natural Resources Company (PXD - Free Report) managed to hike quarterly dividends, following an improvement in Q4 results.
British energy giant BP plc (BP - Free Report) also saw its fourth-quarter earnings skyrocket from the prior year. However, the integrated energy firm maintained its dividend payment even though analysts were expecting it to announce a dividend hike along with quarterly results.
That does not mean that BP is not fundamentally strong enough to raise dividends. In fact, our research shows that the company has the potential to hike dividend in the near term.
Dividends Consistent Despite Crude Downturn
The market has experienced a downturn in crude prices, after average monthly crude prices fell below the $100-per-barrel mark in August 2014.
Excess supply of oil amid lackluster global demand led to multi-year lows for the commodity. The concurrent race for market share among leading crude exporters like Russia, Saudis, and US shale players resulted in crude languishing in bearish territory.
Subsequently, energy players experienced trouble sustaining their businesses, ending up with huge debt loads. Eventually, many energy firms were compelled to stop paying dividends. Though BP couldn’t escape the situation, it did reasonably well when compared to others.
BP has been paying dividends to American Depositary Share (ADS) holders for 13 quarters in a row despite persistent crude weakness. ADS holders will again receive dividend payments on Mar 29, 2018 as announced by the company along with its fourth-quarter 2017 results, the quantum of which has been maintained.
Investors should note that even though BP’s adjusted earnings per ADS was $1.94, 83 cents, and $1.88 in 2015, 2016, and 2017, respectively, the annual dividend of $2.40 paid during each of the respective three years was comparatively higher.
The picture clearly shows that BP has been distributing dividends in excess of their earnings, a trend which may not be sustainable. In fact, the company's current dividend yield of 5.9% is much higher than the industry’s 3.8%. In other words, the era of low crude prices and the oil spill incident of 2010 in the BP-operated Macondo Prospect – events which are still affecting the company – could not deter BP from paying shareholders steady dividends.
Can Investors Expect a Dividend Hike?
Since the beginning of 2018, crude has been trading above the $60-per-barrel psychological mark. Notably, for the first time after 2014, West Texas Intermediate (WTI) crude started off the year above $60 a barrel. We view this as a partial recovery for oil prices, thanks to the extension of the production cut deal by OPEC players.
On Nov 30, 2017, OPEC members met non-OPEC players to decide on an extension of the crude production cut accord, first signed in late 2016, beyond the first quarter of 2018. More than 20 oil producers, including leading exporters like Russia and Saudi Arabia, participated in the meeting. As expected by most analysts, all crude exporters decided to extend the deal through 2018-end. Saudi Arabia, Russia, and their allies have pledged to put 1.8 million barrels a day of crude oil out of market.
The improvement in crude price is favorable for BP as the company has a portfolio of major upstream projects. Last year, BP brought online seven key projects — Khazzan Phase 1, Zohr, Juniper, Persephone, Quad 204, Trinidad Onshore Compression and West Nile Delta - Taurus / Libra — which helped the firm produce record volumes of oil and gas during the October-to-December quarter. In fact, fourth-quarter 2017 production touched the highest mark since the January-to-March quarter of 2011.
BP is also expected to bring online five more upstream developments in 2018. All these projects along with the developments placed online during 2016 will likely help the energy giant add 800,000 barrels of oil equivalent per day to net production capacity by 2020.
All those developments are reflected in the company’s healthy pricing chart. Over the past year, BP has rallied 18%, outperforming the industry’s 8.2% gain. Hence, there are strong reasons to believe BP will be able to boost shareholder’s dividends in the near term.
BP carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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