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Dividend vs Debt

19 June 2020 by jbchevrel

Earlier this week, BP announced it would reduce the value of its oil and gas assets by $17.5B. That reflects BP senior management’s view that essentially oil and gas prices will remain lower for longer. BP 5y CDS underperformance was short lived, it closed the week below 80bp. pre-covid was below 40 and the peak was 250. It is not surprising as we have had a strong week for oil prices, which culminated in the area of 40.5 on WTI and 43 on Brent, until the very end of our London session. BP has about $21B of cash, coming in annually from operations. It invested about $15B in its businesses and paid $8B dividend, having borrowed the $2B difference. Whether or not they keep a 10% like dividend will be interesting, that would be negative for creditors and a yield closer to RDS 4-5% sounds likely, as an outright stock offering is ruled out, at this stage. Now, crude prices have demonstrated that they are still sensitive to negative news about second waves of cases in the US. WTI went from about 40.5 to less than 38.5 in a few hours. The technical supportive of supply cuts would prove insufficient to keep prices at the current ~40 WTI levels in case of more lockdowns in a relatively broad set of countries/regions, something that this week’s surveys seems to discount at about 20-25%