What Is BP’s Cash Flow Strategy?

BP’s cash flow

In 3Q16, BP’s (BP) cash flow from operations stood at $2.5 billion, 52% lower than in 3Q15. BP’s cash outflow from investing stood at $2.9 billion in 3Q16 compared to $4.2 billion in 3Q15.

BP’s cash flow from financing activities mainly consisted of changing debt levels and dividend payments. BP focuses on providing returns to shareholders in the form of dividends. BP’s current dividend yield stands at 6.8%. BP’s peer ExxonMobil’s (XOM) dividend yield stands at 3.4%. Comparatively, Chevron (CVX) and Royal Dutch Shell (RDS.A) have higher dividend yields of 3.8% and 7.2%, respectively.

What Is BP’s Cash Flow Strategy?

Analyzing BP’s cash flow strategy

In 3Q16, BP (BP) generated $2.5 billion in cash from operations. However, the company had a cash outflow of $3.4 billion in the form of capital expenditures and $1.1 billion in the form of dividends, totaling $4.5 billion of cash outflow.

So, how did the company make up for the $2 billion difference in cash flow? Broadly, due to lower cash flow from operations—hit by oil spill charges and lower oil prices—the company had to resort to fresh debt.

This action is no surprise, as BP is focusing on equating its uses and sources of cash at oil price level of $50–$55 per barrel. With oil prices spiking above $50 per barrel lately, we believe that BP could succeed in its goal of equating its cash flows. Other steps such as divestment and cost reduction could also help BP improve its liquidity position.

If you’re looking for exposure to high-dividend stocks, you can consider the iShares Core High Dividend ETF (HDV), which has ~20% exposure to energy sector stocks.

For more on the price direction of crude oil, please read OPEC Mania Fading: Are the Bears Back in the Oil Market?