Commodities

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

BP Plc is at last showing it can cope with a self-inflicted crisis and a savage oil price correction. That alone may not be enough to make investors buy back into the unloved energy sector.

In the first nine months of 2017, the U.K. oil major's operating cash flow comfortably covered its cash dividend payments and organic capital expenditure. BP now appears capable of living within in its means if the oil price is $50 per barrel. The average price in the period was $52 per barrel. Right now, it's just above $60. BP reckons by 2021, it will be able to balance cash-out with cash-in at $35-$40 per barrel.

To underscore its confidence, the company is initiating a share buyback that will offset the dilution caused by part-paying its dividend in shares. While some investors like this so-called scrip dividend, all loathe the dilutive impact.

Out of the Trough
BP's performance has turned a corner
Source: Bloomberg

For BP to be doing a buyback for any reason is a turning point. On an annual basis, the company looks capable of generating about $24 billion of operating cash at $50 oil, covering a roughly $16 billion capex bill leaving $8 billion for dividends and buybacks. If the oil price dips, BP could trim the buybacks or its investment spend.

The legacy of the Gulf of Mexico tragedy remains. But BP can afford the continuing financial impact, estimated to be $2 billion in 2018 and falling thereafter, via the kind of disposals that a company of this size should be making anyway as it manages its portfolio.

It's some of the strongest evidence yet that the oil majors have readjusted their businesses to cope with their cyclical downturn. Share prices have responded accordingly. Yet investors remain to be wholly convinced. As analysts at Barclays note, fund weightings towards the energy sector have barely changed in the last month despite it offering substantially higher dividend yields than the market as a whole.

It's All Relative
BP has shown it can cope with cheap oil, yet investors are enamored of new energy
Source: Bloomberg

There are two causes for hesitation. One is that it's going to take more than just a handful of decent quarters to believe dividends are sustainable. The second is a more fundamental worry. Many still see the long-term trajectory of the oil price as downwards, and would prefer to invest in companies exposed to new energy technologies -- from battery makers to electric car companies like Tesla Inc.

The oil majors can shift their strategy to renewables only so fast, and their capacity to pay big dividends and invest remains constrained. This is a long-term challenge. For now, BP has at least shown it can go from $100-plus oil to sub-$30 oil and emerge with substantial dividend-paying capabilities when not long ago there were questions about its very existence.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net