If higher oil prices persist, investors can expect bigger share buybacks and special dividends, according to fund managers.
“Given higher oil prices and asset disposals, BP's gearing has reduced significantly,” said Simon Murphy, manager of the VT Tyndall Real Income fund.
“Now they feel comfortable forecasting +4 per cent a year dividend growth out to 2025 and $4bn of annual share buybacks.
“But, these are based on $60 oil price forecasts. Obviously, with oil currently over $90 per barrel there exists significant scope for enhanced distributions going forwards.
“We would expect bigger share buybacks and possibly some special dividends if oil prices remain higher for longer, but we are not getting carried away with that idea.”
Given the inherent cyclicality of the industry and the need for significant investment in energy sources for the future, Murphy says BP’s shares already look attractively valued and that any additional distributions, such as special dividends or increased buybacks, would be a bonus.
CJ Cowan, portfolio manager at Quilter Investors, said he has been expecting the energy sector to increase dividends as the oil price increased throughout last year.
“Clearly the move higher in energy prices since the start of December gives further weight to this view.
“Over one, three and six months, the MSCI ACWI energy sector has enjoyed the biggest upward revisions to estimated earnings per share and dividends per share for the coming financial year, which is expected given the oil price movements we’ve seen.”
But Cowan added that supply and demand imbalances were expected to return to “something close to normality” by the middle of this year.
“And if we see a benign outcome in the Ukrainian crisis, then the price increases could unwind very quickly. Also moderating the increases in dividends is the investment in the green energy transition.”
Murphy at Tyndall Investment Management agreed. “We would not expect [BP’s management] to start running the business on the assumption of sustainably higher oil prices for a long period of time.
“BP continues to have a significant investment programme in the years ahead, particularly in terms of investing in new renewable energy sources. This will remain a priority for cashflow in the medium term.”