Since April 2009, when one of BP’s wells leaked millions of barrels of oil into the Gulf of Mexico, the FTSE 100 group has spent US$70bn on the clean-up operation, compensation to residents and businesses as well as some huge fines.
Last year, it spent US$3.2bn and it expects to spend another US$2bn in 2019, by which point more than ten years will have passed since the incident.
Those hefty – and ongoing – costs might have been enough to sink other companies, but not BP, which has not only survived but has managed to continue paying a dividend for all but a few months of the intervening period.
That is testament to the astonishingly large amount of cash it is able to generate every year.
Even factoring in the Deepwater Horizon costs, BP’s operating cash flow was US$22.9bn in 2018 as strong production and higher oil prices fuelled slick growth across the business.
‘Colossal cash-generative ability’
Hargreaves Lansdown analyst Nicholas Hyett praised the performance, saying that it was “comfortably ahead” of what the market had been expecting.
It wasn’t a one-off either. In 2017, with oil prices still in the midst of recovery, the supermajor generated almost US$19bn in cash. Even in 2016, when prices fell to below US$30 a barrel, BP’s operating cash flow was US$10.7bn. All of those numbers include the oil spill costs, too.
“With the group guiding for higher production in 2019 and a further US$10bn in disposals over the next two years, the cash looks set to continue to flow for some years ahead,” added Hyett.
Pay down debt
So, what will it spend the money on?
“In the short term a good portion of that will be used to bring debt back into line with target,” said Hyett.
“But longer term there’s scope for substantial returns to shareholders through dividends and/or share buybacks.”
Debt was a particular focus in BP’s latest results, with the firm’s net debt creeping up to US$44.1bn last year following the US$10.5bn acquisition of BHP Group PLC’s (LON:BHP) US shale assets in July.
That has left its gearing ratio at 30.3% - up from 27.4% a year ago and above management’s target range of 25-30%.
The plan by the end of next year is to have brought that figure back down to around 25%, which will require some debt to be paid down.
Pension fund favourite
As for shareholder returns, BP is a pension fund favourite for a reason: it is an extremely attractive income stock, so investors aren’t likely to be left out.
“Its colossal cash generative ability has enabled the share buyback programme to be an ongoing feature, whilst from an investment perspective, the dividend yield of 6.2% is the icing on the cake,” said interactive investor’s head of market Richard Hunter.
Last year, it bought up US$355mln worth of its own stock, a trend it has already said will continue in 2019. It also returned another US$6.7bn to investors in the form of dividends.
By the time BP has paid what society has deemed it owes for that tragic oil spill almost decade ago, BP will have paid out tens of millions of dollars.
But the fact it generates so much cash every year, means it is not as big an issue as it might be for other firms.