See the mighty fallen. Oil giant BP (LSE: BP) and mining behemoth Anglo American (LSE: AAL) have continued their precipitous descent, crashing 6% and 16%, respectively, in the last month alone. Over the last year, they’re down 24% and a mind-boggling 77%. Things can only get better, can’t they?
BP in troubled waters
Things got worse for BP this week with the share price ending Tuesday a whopping 9.35% down (and taking the entire FTSE 100 lower in the process). A reported $2.6bn of writedowns and restructuring charges doth a market meltdown make, as BP posted a $3.31bn fourth quarter loss and a $5.9bn plunge in full-year underlying profits. This is no crash in the pan, BP has been on a losing streak ever since the Deepwater Horizon disaster, which is soon coming up to its SIXTH anniversary.
It’s hard to believe that BP’s share price once topped 700p (nearly 10 years ago) and even harder to believe it could re-scale those heights, starting from today’s 330p. BP needs oil to hit $60 simply to make its sums balance. As I write this, Brent crude trades at $32 after a frankly pathetic attempt at a fightback. While it stays at today’s levels, BP will continue to lose big money on its upstream business.
Dividend danger
BP currently yields an insane and ultimately unsustainable 11.9%, at a cost of around $7.3bn a year. That took a large bite out of its $20.3bn cash flow in 2015, which also had to cover $17bn of capital expenditure. If the dividend is to continue flowing, BP either needs to raise more debt, or the oil price needs to rise.
At some point, of course, oil will rise. Today’s supply glut will ease as the industry slashes hundreds of billions of dollars of investment and shale hedges run out, upping the pressure on US drillers. Analysts are talking of the price hitting $60 or even $70 and I tend to agree. Oil must rally and when it happens it could rise as swiftly as it fell. But these things are impossible to time, and the rise may not arrive in time to save the dividend. I think there’s worse to come, even though ultimately things will get better at BP.
Anglo American dreamers
I wish I could say something positive about Anglo American, but I think the commodity blow-off has further to go. I can’t see a revival in Chinese demand as it shifts from infrastructure and exports to mature consumption. At least the dividend is no longer in doubt: you won’t get one this year.Â
The good news is that Anglo American’s production has risen strongly to boost revenues, the downside is that it will add to the market glut of metals and minerals. Achieved prices are in freefall, with iron ore down 40% in the second half of last year, copper falling 24%, nickel down 32% and coal around 20% lower.
Anglo American’s pre-tax profits are forecast to fall from ÂŁ1.54bn last year to ÂŁ1.1bn in 2016 (they were ÂŁ10.78bn in 2011), while earnings per share are predicted to drop 36% to 33.47p. I really can’t see Anglo American enjoying much respite this year and fantastical numbers such as a p/e ratio of just 2.1 suggest its troubles are far from over.