BP (LSE: BP) has the energy to weather the oil storm but for how long? ItsQ1 earnings headline figure on 26 April was impressive as losses shrank dramatically, sending the share price higher. But the fact remains that expectations were low, very low. And rightly so, as the price of oil has been so weakover the last year.
And althoughthe price of oil has recovered somewhat since its 12-year low in February, this recovery was partly based on the hope that oil-producing nationswould agree on a production freeze, helping to stabilise the price and (hopefully for BP) drive it higher.
However, the last meeting in Doha saw oil ministers, most notably Saudi Arabia and Iran, no closer to agreement. So dont expect any fast action on supply restrictions that couldboost BPs upstream revenues and help it to deliver much needed capital gains.
BPs dividend in the crosshairs?
The oil price may still be low but BPs yield of around 7% isnt. Its above the sectoraverage and its the yield thats imperative to all income investors, big and small. Soit was reassuring that BP left itsquarterly dividend of $0.10 per share untouched last week.
Yet, I still fear the dividend is vulnerable to a cutback soon. The company has reiterated like many of its peers that it mustcut costs further in order to rebalance cash flows.
In the most recent quarter BPs operating cash flow was around $3bn. On an annualised basis this is around $12bn. This is insufficient to cover both investment and dividend payments as spending is estimated at around $17bn this year. Using last years dividend payout of around $6.7bn as a yardstick, its evident that BP has its work cut out.
Although my crystal ball has been murky of late, I dont see any evidence of a supply and demand balance in oil returning soon. Should oil prices take a turn for the worse, BP may need to get more aggressive with cost-cutting and that lofty dividend could well and truly be in the crosshairs.
Smugglers are out and sales are up
Investors are wise to the fact that withBritish American Tobacco (LSE: BATS), the market gods give with both hands as capital and yield have both appreciated over the past year. The most recent earnings report was solid as cigarette sales volume in its global drive brands Lucky Strike, Pall Mall, Kent and Dunhill was up 10.5%. Importantly, the number of cigarettes the tobacco giant sold in Western Europe shot up 13%, partly due to the reintroduction of national border checks helping to stymie black market sales of cigarettes smuggled infrom the Middle East and Africa.
Unfortunately, BATS warned that the outlook would remain challenging as volatility in emerging market currencies could prove as much as a 7% drag on profits. Whilecontinued weakness in sterling could offset that drag by almost 3%, withsterling startingto recoveramid renewed sentimentthat Brexit wont happen, that boost isnt something BATS can rely on.
Yet this is an investor opportunity. The current share price at 4,186p is only 4% shy of its 52-week high and given the challenging outlook due tovolatility in FX, I expect the price to soften as Brexiteers quieten down and volatility in emerging market currencies unfolds. This should present decent opportunities for a longer-term investment.
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Yasin Ebrahim has no position in any shares mentioned. The Motley Fool UK has recommended BP. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
