BP Adds $12 Billion in Liquidity as It Tries to Protect Dividend

Energy

Published: June 18, 2020 11:53 am

Last Updated: August 3, 2020 1:57 pm

Just days after announcing second-quarter noncash impairment charges that could reach as much as $17.5 billion, BP PLC (NYSE: BP) has new debt totaling about $12 billion in various countries around the world. In the United Kingdom, the rest of Europe and the United States, BP is issuing a total of around $7 billion in perpetual subordinated noncall fixed-rate notes, more commonly called hybrid notes.

The notes are being issued by BP Capital Markets and are “unconditionally and irrevocably guaranteed” by BP and the U.K.-Europe-U.S. notes carry interest rates ranging from 3.25% to 4.25%. Hybrid notes pay investors a regular interest payment but due to their subordinated nature, investors get paid last if the company becomes insolvent. Hybrid notes also do not have a fixed redemption rate but may be redeemed in whole beginning on specified dates.

BP is issuing two euro-denominated notes (valued at €2.5 billion and €2.25 billion) that may be redeemed no earlier than March 22 in either 2026 or 2029 and one sterling-denominated note valued at £1.25 billion that may be redeemed after March 22, 2027. The redemption date can be reset to any date after those initial dates.

Because the hybrid notes do not have to be repaid, they put less pressure on the energy giant’s balance sheet. The anticipated impairment charges will boost BP’s gearing significantly and are quite likely to force the company to reduce its generous dividend of $2.52 per American depositary share (ADS). At a current ADS price of $23.72, the dividend yield is 10.26%.

When BP announced the impending impairment charges earlier this week, the company noted that the global impact of the COVID-19 pandemic could keep the demand for energy lower for a long time. The company also warned of an “acceleration” in the transition to a lower carbon world.

To minimize the impact of a transition to a lower carbon future, BP also said that it expects to produce the “majority” of its reserves and resources over the next decade. BP announced steps it plans to take to reach net zero carbon emissions by 2050, but that timetable may have to be speeded up as a result of the coronavirus outbreak.

BP’s ADSs traded flat just before noon Thursday, at around $23.72, in a 52-week range of $15.51 to $42.70. The consensus 12-month price target on the shares is $32.45.