Could BP Shareholders be in Line for a Much Larger Dividend?

     On April 20, 2010 BP’s Deepwater Horizon’s oil well in the Gulf of Mexico exploded sending the oil rig to the bottom and releasing crude oil from an uncapped hole on the seabed.  The oil well continued to leak for 87 days.   During the 87 days BP made mistake after mistake trying to cap the gushing well.  The news media had a field day vilifying BP.  They continually broadcast report after report claiming that the Gulf of Mexico is now a wasteland and that it may never be repaired.  

     The media way overhyped the situation.  There was barely any oil that contaminated any beaches.   They kept showing this one stretch of beach in Louisiana that got hit.  It was so comical to see people in hazmat suits on beaches next to sunbathers enjoying the late spring weather.  These people in the suits had literally almost nothing to do- they did not care because BP was footing the bill and they need work during the recession.  

     The disaster stayed mostly offshore.  Nature and some key chemicals helped disperse the floating crude once the gusher was capped.    This seemly ended the issue overnight.

     To try and help their case in the public’s eyes, BP agreed to set up a $20 billion trust fund to help people, businesses, and governments effected by the disaster.   They felt that if they made the money available sooner and to more people that the ultimate cost would be less to shareholders.  They were right.  As of December 1^st, 2011 only $7.710 billion of the $20 billion fund has been spoken for.  Almost 90% of all claims that have been made have been paid out.  BP has also settled a number of potential law suits outside of the courts.  Now that the accident is a distant memory it is hard to see any new claimants coming forward.  This is where the increased dividend comes in.

     The $20 billion trust fund was set up to payout to people impacted by the spill and any fines or lawsuits that may arise.   As of September 30, 2011 BP has paid a total of $9.9 billion into the trust fund.  They are required to contribute $1.25 billion quarterly.  Now that a large majority of claims are settled, does BP still need to make their quarterly payment?  The trust fund allows for its expiration.  In the trust fund document it mentions that the fund has a life until April 30, 2016 OR when all claims have been paid (whichever comes first).  It also has a provision that the trusties can dissolve the trust fund once almost all claims have been paid AND they have 110% of the potential claims covered.    

  

     Let’s assume that future US Government fines and lawsuits amount to $2 billion and the remaining claimants another $1 billion (numbers picked out of the air as what might be reasonable).  With payments made to date there would be no need to add more to the fund after the coming up quarterly payment.

     What should BP do with the extra $1.25 billion per quarter if they no longer need to make the payment?    Should they pay down their debt?  They are currently shrinking it slightly over the last few quarters even when making payments to the trust fund.  If they are able to do this now there really is no need to spend the money there.   In addition they already have a very strong balance sheet.  Should they use the money for additional exploratory expenses to enhance future earnings?  There is a solid argument there but they are already spending close to $30 billion per year there.  Would an additional $5 billion make that much of a difference especially now that crude prices are near peak cycle prices?

     I think spending the money on a larger dividend makes the most sense.   Last quarter they paid out $1.227 billion to shareholders @ $.42 per share (US depository shares- annually $1.68).  At the closing rate per share on the NYSE on December 23^rd, 2011 of $43.28 the stock was yielding 3.88%.  If they doubled the dividend to pay out approximately $2.5 billion quarterly (current payout plus the fund payment) the stock will be paying out $3.36 giving it a yield of 7.76%.    To add credence to this payout amount, BP was paying out $.84 per US share per quarter before the accident.   Back then the shares were trading between $35 and $80.  A move like this would definitely have an impact on the price per share.

     Now the question of when.  I would think you would see a move to dissolve the fund late in the summer 2012.  By then almost everything should be settled and BP will have a solid argument to end funding the fund.  Shortly after that you can expect to see a dividend hike.

Full Disclosure

I own or control between 600 and 1000 shares as of December 27^th, 2011.  I have a vested interest in see the dividend increase.