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Jonathan Poland
Jonathan Poland
Articles (498)  | Author's Website |

BP: The Dividend and US Shale

The company has a high yield and a lot of future potential from onshore production

September 19, 2018 | About:

At the end of July, BP PLC (NYSE:BP) announced it is acquiring the bulk of BHP Billiton's (NYSE:BHP) U.S. shale oil and gas assets for $10.5 billion, increasing its land area by roughly half a million acres and helping it gain access to high-quality shale assets like Eagle Ford, Haynesville and the Permian Basin. The deal is expected to close next month.

The agreement comes two years after the company reached a settlement with the U.S. federal government and states around the Gulf of Mexico for the fatal accident at Deepwater Horizon. The 2010 disaster forced the company to sell off billions of dollars in assets and has cost more than $65 billion in clean up and legal fees to date. The company will pay out roughly $23 billion over the next 17 years, which shouldn't be a burden on its financial performance as BP looks to get back to growing shareholder value.

In the last 12 months, BP has earned over $7 billion in net profit on close to $270 billion in revenue. With rising oil prices helping the company's bottom line, analysts are expecting the company to generate $300 billion in sales in 2019 and earn $4 per share. The dividend stands at 5.54%, but that number should increase over time as BP's earnings grow. Management believes that onshore production is poised to jump substantially from 10,000 barrels per day to about 200,000 barrels per day by the early 2020s.

Production growth rates are the highest among big oil producers at 5% per year through 2021. BP has reduced costs so that break-even levels are now $50 per barrel, targeting further reductions to $35 to $40 by 2021. The company is making good money with oil at $70 per barrel and Iran sanctions are expected to boost it over $80 per barrel, plus the next recession could move that price up over $100 per barrel, allowing BP to book record profits if it can meet its break-even targets.

Slowing demand

Peak oil continues to a topic of intense debate. There will come a time when oil demand starts to decline. Recent forecasts from Carbon Tracker Initiative are estimating that date to be around 2023. Earlier this year, Royal Dutch Shell (RDS.B) CEO Ben van Beurden said that demand for oil could peak as early as 2025. When demand stops growing, the idea is that oil prices will decline. Even in decline it will be profitable to produce and sell.

Guru ownership

There is a lot of super investor money in BP. Jim Simons (Trades, Portfolio) has over 9 million shares, Richard Pzena (TradesPortfolio) has over 5.2 million shares and Kahn Brothers (Trades, Portfolio) has over 1.3 million, which is significant since that comprises 10% of their total assets.

While this is not a long-term growth story, the 5.5% dividend is high enough for investors to take a position and wait to see if the stock can double in the next 36 to 48 months.

Disclosure: I am not long or short BP. 

About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website

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