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Dividend doubts give concern to BP boss Tony Hayward

February 4, 2009

The underlying picture at BP is cheerier than it first appears, but questions remain about the oil group’s dividend

For a while yesterday it looked as if the market was going to damn BP’s results with faint praise. Analysts chose to fret about the Q4 loss — a consequence of the falling oil price and a colossal tax bill in Russia — until a soothing lunchtime conference call sparked a modest rally in the share price.

This was a reasonable response, for at least one of those factors is only short term. The tax hit was due entirely to booming crude prices earlier in the year, but future bills will not be so lumpy, since Russia’s tax authorities now plan to determine the rate on a monthly, rather than a quarterly, basis.

The outlook for crude prices is rather more problematic, with little hope of a recovery in 2009, in spite of some signs that demand may not fall much further and the fact that Opec is sure to keep a tight grip on supply in coming months.

The underlying picture, those factors BP can influence, is cheerier. Production in the last three months of 2008 was the best since the second quarter of 2006 — with the Texas City refinery running again and the Thunder Horse platform in the Gulf of Mexico going well. Likewise, BP had a good 2008 in terms of exploration, while 2009 will also see all reserves replaced. The company also has a lower breakeven crude price than rivals, whom it outpaced in cutting costs heading into this downturn.

Despite all this, BP shares still trade at a big discount to those of Royal Dutch Shell, which must cause Tony Hayward, chief executive, concern. Here we come back to crude prices. The market doubts whether, if crude remains this low, the dividend is sustainable. BP is sufficiently lightly geared for this not to be a problem, but investors with long memories recall it remains the most recent oil major to cut its dividend — albeit back in the recession of 1992.

Mr Hayward’s predecessor, Lord Browne of Madingley, was frequently castigated by small investors for paying BP’s dividends in dollars, particularly in 2002, when the pound’s strength against the greenback meant the payout, while rising in dollar terms, actually fell in sterling terms.

Today the strength of the dollar means that, in sterling terms, BP shares offer a prospective yield of more than 8 per cent. Assuming that the payout is held this year, which looks likely, that makes them a roaring buy.

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