Bull and bear: Is this the end of BP as a great dividend payer, or just a step towards something wonderful? - The Share Centre Blog

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Michael Baxter

Bull and bear: Is this the end of BP as a great dividend payer, or just a step towards something wonderful?

Written by: Michael Baxter on October 22nd 2012

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimist view of investment news: Is this the end of BP as a great dividend payer, or just a step towards something wonderful? British company creates petrol from air. Now Japan may be approaching recession.Companies under tax spotlight

Is this the end of BP as a great dividend payer, or just a step towards something wonderful?

The maths is simple enough.  After the deal BP will own 19 per cent of Russia state owned energy company Rosneft. Rosneft says it plans to pay out 25 per cent of its earnings to shareholders. In 2011, Rosneft profits came in at $10.8 billion meaning BP would have earned $540 million. Before the deal, BP’s 50 per cent stake in TNK-BP was earning it dividends greatly excess of that – $3.7 billion in 2011.

So far the maths suggests that post the sale of its stake in TNK-BP, the British oil company will receive roughly around $3.2 billion less in dividends than it was earning before the sale. On the other hand, BP is also getting $11 to $13 billion in cash. Does $11 to 13 billion provide compensation for a loss of £3.2 billion a year? Probably not, but then BP’s income flow from TNK-BP may not have been reliable in the future, and in any case, Rosneft has the potential to grow. Indeed BP can help it to grow, and one assumes it will be rewarded handsomely for doing so.

But then the maths gets more complex. Rosneft will also own a 50 per cent stake in TNK-BP, so one assumes Rosneft will also enjoy a dividend flow from this company, some of which will be returned to BP. There is also talk that Rosneft will buy out BP’s partners in the TNK-BP venture – AAR – too, thus enjoying even higher profits.

The upside is the potential for BP to forge a new and exciting relationship with the Russian government, and provide its expertise in how to obtain oil from those devilishly hard to reach arctic regions. The downside relates to whether BP can truly trust its Russian partner, and indeed it relates to the sheer complexity of the deal.

Not all shareholders in BP are happy. Some want to see the company sell all of its stake in BP-TNK. You can see their argument. After the problems the oil company has experienced in Russia, it is understandable that some are saying ‘get as much cash as you can, and then run’.

Some shareholders then want BP to give just about all the proceeds from the deal to them as share buybacks, or special dividends. They fear that any spare cash loitering on the BP balance sheet will prove too attractive for the US, and Uncle Sam will find a way to grab the money.

But for all its faults, BP remains a company with superb expertise. Assuming the price of oil does not crash (some say it might), but either remains roughly where it is, or even gradually rises as the peak oilers predict, then BP’s expertise may prove to be a very lucrative asset.

It depends on your point of view. If you believe that in the long run oil will rise in price, then surely it makes more sense for BP to invest most of its money in exploration and then extract the black stuff.

If you believe oil will fall in price as China learns how to become more energy efficient, as supply from Iraq rises, as fracking becomes more important and as technology creates viable alternatives to traditional fossil fuels, then now would be a good time for BP to give its money to shareholders – that is while it still has it.

British company creates petrol from air

Talking of rising technology creating viable alternatives to traditional fossil fuels, a British company claims to have found a way to make oil from nothing.

Or perhaps not nothing exactly, but air, which some might say is the same thing

The company concerned is called Air Fuel Synthesis. It states on its web site: “Oil is basically made from carbon and hydrogen. Carbon is in the air in the form of carbon dioxide and hydrogen can be found in water. Air Fuel Synthesis is the process of turning carbon dioxide and hydrogen in water into a sustainable fuel.” The company says that its system uses “renewable energy to capture carbon dioxide and water from CO2 point sources”. It says: “We electrolyse the water to make hydrogen and react the carbon dioxide and hydrogen together to make liquid hydrocarbon fuels.”

There is a lot that’s interesting about this idea. Actually the idea of creating a form of fuel such as methanol is not new. To do this you need a lot of energy and a lot of water. And that’s the catch. Yes you get a form of petrol which is superb at storing energy, but you need to use a lot of energy to create it. But this is where renewables come into their own. The snag with wind power is you need it to be windy to generate energy. With solar power you need light, the more the better (up to a point that is, too much heat can be detrimental to solar panels). But if you can use the energy created at times when it is either very windy, or the right form of sunny, and create a substance such as methanol, then you could be onto a winner.

There is a danger of getting carried away by this opportunity, but, for what’s it’s worth, the company is looking for investment via business angels to fund a 1-tonne a day production plant and the commercialisation of its technology. It has also said it does not want an oil company as an investor. Watch this story closely.

Now Japan may be approaching recession

The first half of the year was pretty good for Japan. In Q1 quarter on quarter growth was 0.2 per cent, and in Q2 it was 02 per cent. But since then things have been getting worrisome.

The latest Tankan surveys for both Japan’s large and medium sized manufacturers fell sharply in October, and were consistent with contraction. In fact the latest survey revealed that credit conditions are very loose, but firms don’t want to borrow.

The Purchasing Managers’ Index for September stood at 48 and has now been below the critical 50 no change mark for four months.

But this morning came news on Japan’s exports and imports, and it wasn’t good. Exports in the year to September fell 10.3 per cent, the biggest fall since April 2011 in the aftermath of the devastating earthquake of that year.

Exports to China fell 14.1 per cent. Clearly the dispute in the East China Sea has not helped.

But exports to the EU were also down – 21.1 per cent; exports to the US rose modestly – by 0.9 per cent.

Recently, China became Japan’s most important trading partner, with Japan selling more goods to China than to the US. One assumes September’s figures put the US back into the top slot.

It was Japan’s first trade deficit in September since 1979.

Companies under tax spotlight

Now it’s the turn of the US techs (and coffee shops) to get their tax affairs scrutinised by the UK press.

The ‘Sunday Times’ revealed that eBay only paid £1.2 million in tax in the UK in 2010, despite £800 million in sales from its UK subsidiaries.

The ‘Guardian’ focused on Amazon, saying the company pays 3 per cent VAT on UK  ebook sales via its Luxemburg tax regime, but charges book publishers 20 per cent VAT. So for Amazon it’s a kind of double scandal; low tax and not being altogether fair to its suppliers. Frankly, if you have ever had dealings with Amazon as a supplier, that second allegation will not come as a surprise at all.

Both Facebook and Starbucks have been on the receiving end of press ‘exposes’. Reuters claims that Starbucks paid zero tax in the UK despite sales of £398 million last year, while Facebook apparently paid only £238,000 in UK tax from sales of £20.4 million.

That’s the snag with globalisation, of course. What can be done about it? How about forming a huge trading block big enough so say to such corporates: pay your tax or get out. Such a block might cover, say, the whole of Europe. Actually, on thinking about it, such a block exists: it’s called the EU. However, most the biggest critics of companies not paying taxes are also the ones who say we need to withdraw from the EU.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Air Fuel Synthesis, BP Rosneft, ebay amazon Facebook starbucks tax, Japan economy recession exports, methanol, Peak Oil, petrol from air, TNK-BP

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