Being an oil investor, either directly or indirectly via exposure to oil equities has been extremely tough during the past 24 months. Even BP (LSE: BP), one of the worlds largest integrated oil companies (a business designed to weather all economicenvironments) announced a record annual loss of $6.5bn last year.
Over the past 12 months, BP shares have lost 25% of their value (excluding dividends), and the shares now trade close to a five-year low. If you exclude June and July 2010, when the Gulf of Mexico disaster rocked BP to its core, BP shares are now trading at their lowest level this century.
Unfortunately, BPs share price is highly correlated with the oil price, and unless oil prices start to head higher, theres a chance that BP shares could fall further. Still, at present BP is trading at a forward P/E of 14.6, which isnt overly expensive and this valuation is based on current oil prices. So, unless oil prices fall significantly from current levels, BPs low valuation should provide some support against further declines.
Whats more, BPs management has stated that the company is committed to its dividend payout. Now, this may or may not be the right thing to do. BP is currently borrowing money to fund its dividend payout, and clearly this cant go on forever. However, BPs balance sheet is relatively clean. As of 31 December,BP had total debts of $53bn, cash of $26.6bn and a net debt-to-equity ratio of 27%. The companys dividend payout currently costs around $6.6bn a year, and with such a clean balance sheet, it looks as if BP will be able to sustain this payout in the near term through debt issuance.
If BP can sustain its dividend for the long term at current oil prices (current management rhetoric suggests that this is the intention), then investors will begin to buy the companys shares for yield. And with a dividend yield of 8.3% at present, its already difficult for income seekers to ignore the opportunity BP presents. If BP shares were to fall another 25%, to around 255p, they would support a dividend yield of 10.1% and at this level, its highly likely income seekers would bid the companys shares backup to 350p-plus.
Having said all of the aboveit looks as if the real question should be: Can BP sustain its dividend?
Management is doing everything it can to ensure that the companys dividend payout is protected. Capex spending has been slashed to a bare minimum, thousands of jobs have been axed, several large new projects have been suspended, and the company is planning to divest up to $8bn of assets over the next two years.
So all in all, it looks as if BP is doing everything it can to safeguard its dividend andthis should have a direct effect on the share price. If the dividend is maintained, income seekers will continue to look to BPs shares for income and support should limit further capital losses.
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