Price fall threatens oil giants' dividends

Published on Saturday 24 October 2009 14:49

BRITAIN'S largest oil companies will come under pressure over their dividend payments this week when they reveal a major fall in profits.

While the price of oil hit $80 a barrel last week, more than double the low hit earlier this year, it is well below the record $147 a barrel it briefly traded at last July, hitting revenues across the oil sector.

Both BP and Royal Dutch Shell, are set to report that profits in the three months to September 30 have more than halved.

The two oil majors are important to the UK's financial system because of their dividend payments – BP is likely to return about $10.5 billion (6.4bn) to shareholders this year – but there are fears that the returns will have to be cut.

Leading fund manager Neil Woodford, who manages around 18bn at Invesco Perpetual, said this month that he sold his stakes in BP and Shell because they may have to cut dividend payments in 2010.

BP, which reports figures on Tuesday, is expected to announce a 64 per cent fall in third quarter pre-tax profits to $3.16bn. Analysts are predicting that its quarterly dividend will be at least maintained at 14 cents a share, but Charles Stanley analyst Tony Shepard said BP's cashflow and dividend outlook will come under scrutiny.

"At the moment, BP is increasing debt to fund the dividend and investing to grow the business, though (new projects] will require substantial capital investment to be brought on stream."

BP has already been trimming its capital expenditure budget for 2009 and now expects to spend "less than $20bn", while it has also targeted $1bn in savings from its supply chain.

BP, which has been on a campaign to turn around its poor refining performance during the past 18 months, has been buoyed during the period by major discoveries in Angola and Mexico.

But the firm has also received unwelcome attention for its ties with Libya.

Shell is expected to at least maintain its quarterly dividend, but it is also building up debt to cover the payments. The Anglo-Dutch company reports its third- quarter figures on Thursday, with analysts forecasting pre-tax profits of $2.5bn, compared to more than $10bn for the same time a year earlier.