With the impending sale of some of its U.K. upstream interests to Premier Oil PLC for $625 million, BP PLC is one step closer to completing its $10 billion divestment program, reducing debt and starting buybacks, according to analysts.
"I expect the proceeds to be used for debt reduction," Edward Jones senior equity analyst Jennifer Rowland said in a Jan. 7 email. "While BP has come a long way in reducing leverage, I think we need to see further debt reduction before the company can meaningfully start buying back stock. The asset sales help them get one step closer."
While the divestitures are key to the oil major's ability to reduce debt and raise its dividend, a payout to shareholders will not be in the cards until after Bernard Looney, the head of the company's upstream business, takes the reins from retiring CEO Bob Dudley at the end of March, analysts said.
BP's 2.5% dividend increase in the second quarter of 2018 was its first in nearly four years. The dividend has remained at 10.25 cents per share since then, even as investors have been ratcheting up pressure on large oil companies to hike dividends following stronger earnings, rising cash flow and production growth.
However, BP's indebtedness rose to 31.7% at the end of the third quarter of 2019, from 31% in the previous quarter and 23% in the same quarter of 2018. Several analysts believe that BP's gearing may have topped out and could move into the 20% to 30% guidance range this year, assuming the divestiture target is met, they said.
BP kicked off its noncore asset sale program in 2018 to help fund its $10.5 billion purchase of shale assets in the Permian Basin, the Eagle Ford Shale in Texas and the Haynesville region in Texas and Louisiana from BHP Group. In October 2019, BP said it could wrap up its $10 billion sales program ahead of schedule before the end of 2020 but would take a write-down of as much as $3 billion related to some of its recent divestitures.
BP sold off most of its Permian Basin shale assets in 2010 to Apache Corp. to help defray the costs of damages related to the Deepwater Horizon explosion and oil spill in the Gulf of Mexico that same year.