Stock of the Day: BP shares should close the gap to Shell’s

With the worst is over for BP, dividends could head higher.

Now that the worst is over for BP, dividends could be on the up.

That’s after underlying net profit gushed 138% higher to $6.2bn in 2017, allowing Britain’s No.2 oil major to book its first organic net cash balance since 2014. Strictly speaking, with payments for the 2010 Gulf of Mexico oil spill of $5.2bn, BP’s free cash flow situation, after dividends and capex, looks quite different. But BP still aims to cover such outlays with asset sales whilst a similar payment is forecast to come down to $1.1bn by 2020.  

At the same time, BP would still be profitable even if crude oil fell to $50 a barrel, if not below. Current oil values, would allow a disciplined capex within the group’s $15bn-$17bn annual range. If seen, around $9bn would remain that could be used for dividends, up 150% against 2017.

To be sure, significant execution risks remain. But a relatively benign oil price outlook could favour BP shares at least as much as those of arch rival Royal Dutch Shell. BP shares rose around 1.4% over one year compared to Shell’s 7% move. That differential looks likely to narrow now.

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