UK Stockmarket 2009 and beyond

sabretoothtigger

Even then got to think of forecast earnings and costs. This is BP vs Shell

The Fundamentalist: BP pays dividends

By John Harrington

Date: Friday 30 Oct 2009

If you are a contrarian investor, oil giant BP is not the investment for you, as brokers have been queuing up to talk up the shares following the company’s forecast-busting third quarter results.

Charles Stanley upgraded the stock from ‘hold’ to ‘accumulate’ after BP declared underlying third quarter earnings of $4.7bn that were comfortably ahead of market expectations of $3.2bn.

Killik & Co., meanwhile, said the results ‘provided further reassurance that, in the current oil price environment, the attractive 6% dividend yield is sustainable.’

That 6% yield has now eased to around 5.7% after the shares reacted positively to the third quarter update, but it is still a return which knocks into a cocked hat the 3.3% return offered by the best easy access savings account I could find.

Of course, the BP dividend is not guaranteed, and the very fact that the dividend yield is half as high again as the 3.8% returned by the FTSE All-Share index is testament to the fact that the market reckons BP may struggle to maintain its dividends if events move against them.

BP’s dividend cover is 2.0 on an historic basis, but is forecast to decline to 1.1, which means the market thinks the company will barely be earning enough next year to finance its dividend payments.

This does not preclude the possibility of BP borrowing money to maintain its dividend until better times arrive. Chief executive officer Tony Heyward has spoken of using ‘the capacity of our balance sheet while the industry cost structure adjusts,'

If the market is wrong to worry about the sustainability of the BP dividend then for BP’s dividend yield to move to the market norm of 3.8% would require the share price to rise from 574p to 861p. On the other hand, if it has got it right, the dividend yield could be adjusted down to 3.8% by a cut in the annual divi from 32.7p to 21.8p.

Which of the above two scenarios is more likely?

Not surprisingly, the answer depends on where you see the oil price moving in the near to medium term.

Back in February, BP chief executive officer Tony Heyward said: ‘On the basis of our current plans, we expect 2009 cash flows to balance at an oil price of between $50 and $60 a barrel, with that break-even point continuing to reduce as upstream volumes grow, the full turnaround of the downstream is realised, and our ongoing cost initiatives deliver further benefits across all parts of the group.'

In the third quarter of 2009 the average realised price achieved by BP was $68.08 per barrel for Brent crude and $68.12 for West Texas Intermediate (WTI), comfortably above the $50-$60 break-even area, but well down on the $115.09 (Brent) and $118.07 (WTI) seen in the third quarter of last year.

The oil price since then has improved further still, while the group said it expects to cut more costs this year than it had initially planned, raising its full year cost savings target to $4bn from $3bn. Costs for the first nine months of this year were down more than 15% from last year, BP said.

Heyward certainly makes the right noises concerning the company’s commitment to its dividend pay out. ‘Our aim remains to strike the right balance for our shareholders between investing for the future, providing current returns via the dividend, and ensuring an appropriate and prudent level of gearing,’ the BP boss said at a company presentation earlier this year.

Anglo-Dutch rival, Royal Dutch Shell, meanwhile, felt confident enough this week in its near-term future to lift its dividend by 5% to 42 cents a share, which possibly is a good omen for BP.

Longer term, BP has the mouth watering prospect of exploiting what it has called a ‘giant’ oil discovery at its Tiber Prospect in the deepwater Gulf of Mexico, which could hold more than 3bn barrels, though it is one of the deepest wells ever drilled in the oil and gas industry, which could present a few extraction problems.

It was also the only major Western oil firm to be successful in its first-round bid to develop an Iraqi oilfield. BP intends to spend up to $20bn with China National Petroleum Company on the ‘supergiant’ Rumaila field Iraq.

Next year, it intends to spend in excess of $1bn on drilling its two concessions in Libya, both of which are enormous, with one block the size of Kuwait and the other the size of Belgium.

This level of expenditure highlights another danger to the sustainability of the dividend. BP has to – sooner or later – invest to exploit these assets and when push comes to shove, if it needs to free up funds to do so then a high dividend yield will offer the tempting option of cutting the dividend, if only because it can pull the usual managerial sleight of hand of passing it off as ‘rebasing’ the dividend.

In Kenya, Aggreko has installed enough generators to supply the national grid with a third of its power needs

While Aggreko’s transactional business — supplying short-term and emergency power — suffered in the first half, with profits down by almost a third, IPP’s revenues [International Power Projects (IPP), Aggreko’s emerging market utility business] were up by 40 per cent and profits were up 72 per cent to $104 million (£64 million) in constant currencies.

http://www.iii.co.uk/investment/detail/?display=discussion&code=cotn%3AAGK.L&it=le&action=detail&id=5225736

Thrugelmir

tonygee wrote: »

Hi thrugelmir,Im a big fan of successful,profitable good dividend paying companies but timing is everything.If you think everything is hunky and these companies are without problems then snap them up.Dont be suprised to find youre 5% Dividend is offset by a 20-25% loss in the share price if/when things turn sour.

I've always bought shares ex-dividend. Coming from a finance background. The soundness of a Companies balance sheet is an important factor for me. So even if share prices move up and down. The core business is the same.

I don't have access to minute to minute trading systems, nor the time to monitor events. Also analysts tend to get briefings before the wider public, so news is often out of date in trading terms. I tend to hold and invest for the longer term. Looking more for out of favour sectors than the fad of the day.

tonygee_3

Thrugelmir wrote: »

The soundness of a Companies balance sheet is an important factor for me. So even if share prices move up and down. The core business is the same.

I suspect that many long term holders of BANK shares held the same philosophy:eek:

Thrugelmir

tonygee wrote: »

I suspect that many long term holders of BANK shares held the same philosophy:eek:

Interestingly many people bailed out of certain financial shares some years ago. On the basis of their business models - ie Northern Rock.

My only direct exposure to bank shares in the past 7 years has been HSBC, Standard Chartered and Lloyds. Lloyds itself is still a fundamentally sound business, its HBOS which should have been nationalised.

fullstop

Questor in The Daily Telegraph today thinks the recent fall in the share price of Standard Chartered presents a buying opportunity. The situation in Dubai should not be too painful to their results.

sabretoothtigger

Standard being one of the most heavily exposed banks to the region — some $12 billion (£7.5 billion) out of the $50 billion lent by British banks to the United Arab Emirates — and impairments from the Middle East and South Asia accounting for 60 per cent of the total in its wholesale division in the first half of 2009, the Dubai difficulty is unlikely to go away

http://business.timesonline.co.uk/tol/business/columnists/article6950990.ece


They are making all time high profits I think but with a lower share price then before, its probably a decent buy on those simple reasons. Was a definite buy below 10 but I dont suppose we'll get that again now

They were due to buy asia assets from rbs but they decided it was better to develop what they had as the price was not right. Now HSBC will pick up those assets apparently


Barclays recovered quite well today after breaching 285 yesterday but xlf in the states isnt so positive so I expect barclays to not take off again just yet

Thrugelmir

sabretoothtigger wrote: »

Barclays recovered quite well today after breaching 285 yesterday but xlf in the states isnt so positive so I expect barclays to not take off again just yet

Barclays HY results were flattered by the profits made on trading out the Lehmans "book" it acquired. Underlying core business wasn't exciting. I would want to see the Annual results now before investing.

tonygee_3

sabretoothtigger wrote: »

Found this from earlier in this thread(Thanks to sabre,April)I Get the feeling were around Complacency/Anxiety Now

Thrugelmir

tonygee wrote: »

Found this from earlier in this thread(Thanks to sabre,April)I Get the feeling were around Complacency/Anxiety Now

Denial maybe?

StevieJ

Thrugelmir wrote: »

Denial maybe?

I think that is just you