Shell, BP dividends in jeopardy

MARKIT has warned that the oil slump could jeopardise payouts from some oil majors in coming years, despite the market data firm predicting that Britain's top companies were set to return £85.3 billion ($A159.89 billion) to shareholders – nearly 11% more than the year before.
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Markit head of dividend research Ryan Bransfield told CNBC that the key concern with the likes of Royal Dutch Shell and BP - both listed on the FTSA 100 index of biggest UK companies - were the concentration risk and concerns around sustained low oil prices.

"The risk is that given that these companies in the oil and gas sector account for 15% of the total payout, if the oil price remains low for a sustained period, this could become a risk and investors could find themselves skating on thin ice next [fiscal] year," he said.

"Our expectation is no change to payment [for 2014]. They [the companies] have been emphatic; they have emphasised their commitment to the dividend.

"They have been very focused on reining in spending and asset disposal and propping up the balance sheet."

Even aside from oil slump concerns, BP is still plagued by issues related to compensation claims from the 2010 Gulf of Mexico oil spill and from its holdings in Russian firm Rosneft, which gives BP dangerous exposure to Western sanctions on Russia over its actions in Ukraine.

"At current levels the dividends (of BP and Shell) are not covered by free cash flow, meaning payouts need to be funded from debt," Bransfield and colleague Kevin Soyer said in a Markit report.

"We believe that BP and Shell should be able to sustain payments in the near-term but reduced revenues have lowered our expectations for growth.

"If the oil price remains below $80 per barrel for more than one year, then capex budgets across the sector would need to be cut very aggressively in order to protect dividends."

While some analysts were recently bullish on BP's future, especially with the fundamental valuation that has been placed on it which has pushed its yield up, others believe the coming loss for BP will be "considerable", as Rosneft accounts for about 30% of the British super major's business.

Energy was the weakest sector in the S&P 500 when oil prices fell below $US50/barrel on Monday, with Anadarko Petroleum, Transocean, Noble Energy and Denbury Resources particularly badly hit.