BP Swaps Show 65% Lower Dividend in 2011 on Oil Spill

BP CEO Robert Dudley
After taking a $32 billion charge in the second quarter, newly appointed CEO Robert Dudley, seen here, said that the company won’t rush back to being one of the highest-yielding stocks in the oil industry. Photographer: Rupert Hartley/Bloomberg

BP Plc, selling $30 billion assets to pay for President Barack Obama’s Gulf of Mexico spill fund, will restore dividends at 65 percent below their previous level next year, derivative prices show.

Dividend swaps trading in the over-the-counter market this week imply a full-year dividend of about 13 pence in 2011, according to Bhavin Patel, an equity derivatives strategist at Royal Bank of Scotland Group Plc in London. For 2012, swaps trading implies a payout of about 16 pence. BP’s 2009 annual return was 36.42 pence (56 U.S. cents) a share.

After taking a $32 billion charge in the second quarter, newly appointed Chief Executive Officer Robert Dudley said that the company won’t rush back to being one of the highest-yielding stocks in the oil industry. BP canceled the dividend for the first three quarters of 2010 when it agreed with Obama to set up a $20 billion fund to compensate victims of the worst oil spill in U.S. history.

“They may start with a new dividend in 2011, but then it will be lower,” said Gudmund Halle Isfeldt, an analyst at DnB NOR ASA in Oslo. “It’s important for investors that they pay a dividend, and the company wants to get back on the scene. Selling assets is what will give them the option to pay, the uncertain part is the politics.”

The swaps, where investors wager against each other on the future level of payments, show the projected dividend for 2011 has fallen from 18 pence two months ago, RBS said.

The dividend implied using calculations on BP options contracts show a payout of about 14 pence in 2011, according to Bloomberg data.

Longer Suspension

The company may extend the suspension of the dividend longer than three quarters, analysts said, after the spill triggered asset sales, cost CEO Tony Hayward his job and prompted U.S. Congress to debate measures that would ban the company from new leases. Paying dividends too early risks increasing the political pressure on the company, while waiting too long may scare off pension funds and other long-term investors that relied on BP in the past.

Isfeldt said that the earliest BP would pay a dividend again would be for the first quarter of next year, scheduled to be announced in April. Iain Armstrong, an analyst at broker Brewin Dolphin Ltd., said it’s more likely to resume payments for the third quarter of 2011. BP says it will consider a dividend for the fourth quarter of this year, which would be announced in February.

Track Record

Before the accident, BP had a record of giving back more money to shareholders than rivals. The dividend yield, or annual return from the dividend compared to the price of the shares, was 6 percent on the day of the Gulf accident when the share price reached its highest this year. That compared with a dividend yield of 5.2 percent for Royal Dutch Shell Group Plc and 2.4 percent for Exxon Mobil Corp.

When asked if BP would seek to re-establish itself as an industry leader in yields, on July 27 Dudley said, “No one’s saying we’re going to rush back into the same dividend philosophy or character of the company.”

BP may become less attractive to institutional investors if it can’t restore the payouts, said Christine Tiscareno, an analyst at Standard & Poor’s in London. The company accounted for about 14 percent of all dividends paid in the U.K. last year, according to Morgan Stanley. California Public Employees Retirement System, Texan Teachers Retirement System and the Canadian Pension Plan still own shares, according to regulatory filings from July 1.

New Customers

“The ones who used BP as an annuity aren’t going to come back,” Tiscareno said. “They’ll have to find new customers. That’s why it will take a long time for the stock to get back.”

Shares are down more than 30 percent since the accident. While 28 analysts have a “buy” rating on the stock and 11 have a “hold,” only four give it a price target higher than the 655.40 pence it achieved on April 20, the day of the blowout on the Deepwater Horizon rig that killed 11 workers and started the three-month long oil leak.

BP Chairman Carl-Henric Svanberg said that the company will triple its planned asset sales to $30 billion to meet the charge it took. The company this week sold $1.9 billion of assets in Colombia after $7 billion deal last month with Apache Corp. for fields in the U.S., Canada and Egypt. It also plans to sell holdings in Venezuela, Pakistan and Vietnam, and may divest part of its stake in Prudhoe Bay, Alaska.

“It takes months to negotiate these deals,” said Iain Armstrong, an analyst at Brewin Dolphin Ltd. in London. “If the asset sales weren’t relevant to the dividend, I’d be in the camp that says they’ll pay one at year-end. But there are lots of moving parts, it takes time.”

Svanberg said the company is trying to get back to paying dividends, though it won’t discuss it until the fourth quarter.

“If we can create the position where we have assets disposed that give us the financial depth to meet those obligations that we’re facing, then that will give us a chance to come back quick to dividends,” Svanberg said July 27. “But we will come back and talk about that.”

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