BP has announced underlying profits fell by 56% in 2016, to $2.6 billion from $5.9 billion in 2015. At a headline level BP made $115 million profits, lowered by a $4 billion charge relating to the 2010 Gulf of Mexico oil spill. From Laith Khalaf, Senior Analyst, Hargreaves Lansdown.

BP expects the cash payments related to the oil spill to fall from $7.1 billion in 2016 to $1 billion a year from 2019. BP continues to pay a quarterly dividend of 10 cents. In 2016 it issued around a third of its dividends in BP shares under the terms of its scrip dividend scheme, equivalent to $2.9 billion. Shares fell 2% in early morning trading.

The Gulf of Mexico oil spill continues to cast a long shadow on BP’s financial performance, though the company now expects this to diminish significantly over the next few years. The pricing environment remains challenging for the oil majors, and while things are looking better than they did a year ago, we’re still a long way short of those halcyon days when oil traded at over $100 a barrel.

Indeed BP needs oil to fetch $60 a barrel this year to effectively break even, and with Brent currently trading at around $56, it is still dependent on fair winds from the commodity markets to push it along. BP continues to pay out a quarterly dividend of 10 cents, which works out at an annual yield of almost 7%. That premium yield reflects the limited scope for dividend growth in the immediate future, combined with the risk of pressure on the dividend if commodity markets fall backwards again.

One worrying aspect of the dividend is the colossal amount being paid out in shares rather than cash, which increases the number of mouths to feed next time a payment is made. BP issued $2.9 billion of shares in lieu of dividends in 2016; shares which if listed separately would form a company at the top end of the FTSE 250.’