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Oil prices have taken a hammering this week, sending BP’s share price into freefall – down almost 20 per cent at one point, now back up to 283.68p at the time of writing.
The threat of an oil price war is looming ever closer after the Saudi energy ministry requested that Saudi Aramco increase its production capacity by 1 million barrels a day on Wednesday.
That, and coronavirus fears, sent oil prices tumbling by more than 30 per cent earlier in the week to below $30 a barrel.
BP’s share price has dropped by a third since the start of the year so can the stock dig itself out of this hole or is the crash set to continue?
Opinions are divided on this – some have pointed out that BP has strengthened its profitability by investing in its Upstream and Downstream projects and improved its financial position in recent years. Others have also highlighted that producing oil and gas is only part of the group’s operations and in 2019 its downstream business made $6.4 bn underlying profit, which could provide vital cash flow, on top of BP’s robust balance sheet.
Some analysts are less convinced though, especially in light of an impending oil price crash – Michael Hewson from CMC Markets said: “The slide in BP’s share price is a particular concern, given their breakeven price is just under $50 a barrel.”
Shell’s share price has also shattered in the wake of this week’s events, also falling almost 20 per cent although its stock has now risen to 1,212.20 at the time of writing.
Shell’s team claim it has the capability of defending an oil price crash – in a pre-arranged meeting it said there was around $4bn of flexibility in its sustaining capital expenditure, making it cash neutral into the $40 a barrel price range.
Analysts, UBS, believe the oil giant is in a good place to defend its dividend despite the current situation, saying that “modest disposal activity and some balance sheet capacity” will help.
Neil Wilson from CMC Markets is not so convinced though, saying that “there will be serious damage done this time, and it will last. You’ve got to seriously question whether BP and Shell will be able maintain dividends when crude is trading at $30.”
Analyst JP Morgan is also less positive about Shell’s ability to bounce back – it downgraded Shell’s rating to ‘neutral’ describing it as the most vulnerable to the market’s demand risk amongst the ‘big oil firms.’
Between coronavirus and the potential price war between Saudi and Russia, times are likely to be turbulent for the oil firms but whether dividends are at risk remains to be seen.
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