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BP chief hints at dividend freeze

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By Ed Crooks, Energy Editor

Published: March 3 2009 23:31 | Last updated: March 3 2009 23:31

BP expects to freeze its dividend this year, its chief executive has told the Financial Times, as the company struggles to adjust to the plunge in the price of oil to about $45 a barrel.

A failure to increase the dividend, BP’s first freeze since 1999, would disappoint investors hoping for income growth. The company paid out more in dividends than any other British company last year, accounting for £6.7bn of the £58.6bn paid out by the constituents of the FTSE All-Share index.

Fears about the dividend helped drive BP shares down 4 per cent on Monday, outpacing a falling market.

The shares yield more than 9 per cent, reflecting fears that the dividend could be cut again, as it was in 1992.

However, BP insisted that the payout could be maintained for this year and next, even if the oil price stayed at its present level.

Tony Hayward, BP’s chief executive, warned in BP’s annual strategy presentation that the company did not “expect a quick recovery” in the oil market, and it would be “wise to prepare for continued volatility, which could extend into 2010”.

He said: “This difficult period could last some time.”

Speaking later to the FT, Mr Hayward said that because of the tough times facing the industry, “we don’t at this moment anticipate” a rise in the dividend for this year.

BP needs an oil price of $60 per barrel to be able to pay for its dividend and its planned $20bn-$21bn (£14.2bn-£15bn) capital spending programme from its cash flow, so it is likely to have to borrow to meet those commitments.

Mr Hayward said that the industry’s costs had doubled since 2004 but the oil price had returned to its level of that year, and if the price stayed at about $45 a barrel costs would have to halve again.

BP is cutting costs by going beyond its previously planned 5,000 job losses, freezing pay for many staff, including most managers, and pushing for price cuts from its suppliers.

It is cutting its planned investment in alternative energy, such as wind and solar power, to less than $1bn this year, from $1.4bn last year.

A proposal to bring outside investors into the alternative energy division, possibly by selling shares, has been abandoned, probably for ever.

The financial pressure also means BP is unlikely to make any large acquisitions, concentrating instead on developing its resource base, which it said was 18.2bn barrels of oil equivalent in proved reserves and a further 43.4bn barrels of accessible but unproved resources.

Those resources would enable its production to grow by 1-2 per cent until 2020, even without making any further oil and gas discoveries, it said.

Iain Reid of Macquarie Securities said in a note that BP’s cost cuts should enable it to sustain both capital spending and the dividend.

“This makes the estimated 2009 yield of 9 per cent to a UK investor look very attractive as it appears to be sustainable,” he added.

Additional reporting by Neil Hume in London

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