Image:-BP hikes debt, keeps dividend as coronavirus hammers profits
London-based BP said it expected significantly lower refining margins in the second quarter when global movement restrictions to halt the spread of the virus peaked, throttling gasoline, diesel and jet fuel consumption.
At 0750 GMT, BP shares fell 2 per cent, as analysts questioned whether sticking to the dividend and hiking debt was a prudent strategy. .SXEP's broader European energy index fell by 0.9%.
"I can see many reasons why this recovery will take longer and so I think we've been in this for quite some time," said Bernard Looney, chief executive, who took over in February, to Reuters.
The company said that oil and gas production faced "significant uncertainties" associated with the collapse of oil demand and falling prices, as well as a deal between OPEC, Russia and other producers to reduce global crude supplies by around 10%.
BP reported an underlying cost-benefit replacement, its $800 million net income definition, beating analysts' $710 million forecast in an enterprise-provided poll. A year earlier the company reported profit of $2.4 billion.
But BP, whose net debt has climbed to its highest since at least 2015, kept its 10.5 cents per share dividend and said it had repurchased $776 million worth of shares in the quarter.
Stuart Joyner, Redburn's equity analyst, said BP's "large increase in net debt overshadows (its) underlying earnings beat." "While the quarterly dividend was maintained at 10.5 cents, serious questions remain about its affordability," he added.
The company reported a loss of $4.4 billion, which included inventory charges of $3.7 billion for the oil it holds.
After raising it in February, BP has so far resisted cutting its dividend, although some investors have said top oil and gas companies should consider reducing shareholder payouts.
Norway's Equinor became the first big oil company to cut its dividend, cutting by two-thirds its first-quarter payout and suspending a $5 billion share buyback.
BP, like its peers, responded by sharply reducing spending to the 65 per cent drop in oil prices in the first quarter. The company slashed its 2020 budget to around $12 billion by 25 percent and lowered output at its U.S. shale operations. .
Looney said BP was aiming to cut costs so it could generate profits and pay dividends at an oil price of $35 a barrel in 2021, down from a $56 a barrel breakeven in 2019. He said that next year's spending could be further cut.
Benchmark Brent crude LCOc1 slumped to its lowest this month in two decades and traded around $19 on Tuesday.
"At this point, the key question is how far BP is prepared to push the balance sheet to protect its dividend," RBC wrote in a note, adding that it could end up spending the rest of 2020 and 2021 trying to pay down debt to reduce its gearing.
In the first quarter, BP's debt rose to $51.4 billion and its debt-to-capital ratio or gearing rose to 36 percent, significantly higher than its target of keeping it below 30%.
At the end of the first quarter, BP held $32 billion in liquidity, after raising extra funds.
Cash flow shrank in the quarter to $1 billion, the lowest in at least six years, compared to last year's $5.3 billion.
BP's quarterly output amounted to 2.58 million barrels of oil equivalent, excluding its stake in Russia's Rosneft, and 2.9 per cent lower than a year ago.
Over the first quarter it secured an average price of $31.80 per barrel of oil equivalent, a fifth less than a year ago.