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BP, other oil firms to take on added debt as revenues fall

Chicago Tribune

Analysts’ recommendations on shares are mixed

QPlease comment on the prospects for stock of BP PLC. I did not envision its decline.

M.J., via the Internet

ALower oil prices make two groups unhappy: Oil companies and their shareholders.

The world’s third-largest oil company, behind Exxon Mobil and Royal Dutch Shell, has reduced its production forecast for the next several years and is reviewing its degree of investment in major projects around the world.

Because of lower oil revenues, all oil firms will need to assume increased debt in coming years to cover their dividends, capital spending and exploration costs, BP Chief Executive Tony Hayward has warned. Natural gas prices also have weakened.

Hayward estimates oil prices must reach $50 a barrel to cover this year’s dividend and $60 to cover the dividend and investment in projects. 

BP will continue to pay a dividend, Hayward has said. Although the firm has a large cash cushion from years of profitability, some analysts question his decision.

London-based BP’s shares are down 18 percent this year following last year’s 36 percent decline. The company had a loss of $3.3 billion in the 2008 fourth quarter as it sold its oil and natural gas at prices 37 percent lower than a year earlier.

Analyst recommendations on BP shares, according to Thomson Reuters, consist of four “strong buys,” three “buys,” four “holds” and one “underperform.”

Hayward’s plan for corporate simplification, which seeks improvement in efficiency and practices, has been a focus since he assumed the top position in 2007. Prior BP problems included a refinery explosion in Texas City, Texas, and Alaskan pipeline leaks.

BP, which grew from the 1998 merger with Amoco, also acquired Arco and Castrol in 2000. It has vast global reserves, including significant production from its joint venture in Russia, where political risks are high.

BP earnings are expected to decline 43 percent this year and 35 percent next year. 

QI now hear all the time about cash investments. What exactly are these?

O.T., via the Internet

ACash investments are short-term instruments that don’t lose value and can be quickly redeemed.

Although their interest-rate yield is low and temporary, they gain in popularity during periods when other investments have been tumbling in value. Every portfolio should have some cash investments to cope with emergencies.

“People are getting more concerned about the return of their money than the return on their money,” said Marilyn Capelli Dimitroff, certified financial planner and president of Capelli Financial Services Inc. in Bloomfield Hills, Mich. “Cash investments offer the ultimate safety and liquidity.”

Among the cash choices offering immediate access to your money are money-market funds, bank money-market accounts and checking accounts. Bank certificates of deposit have penalties for early withdrawal but pay higher rates, while U.S. Treasury bills are a low-cost government investment vehicle that matures in three, six or 12 months. 

“Remember that if you sell Treasuries prior to their maturity there is no guarantee that you’ll get your full principal back,” Capelli Dimitroff said. 

Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney @tribune.com.

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