BP adds fuel to City jitters: Neil Thapar explains why the oil giant's results are being awaited with bated breath

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The Independent Online
THE CITY is today braced for one of the most important sets of results from British Petroleum in its recent history.

Last month the oil giant, which is facing a worrying level of financial and operational problems, jettisoned Robert Horton as its chairman and chief executive in a sensational boardroom coup.

Since then it has kept everyone guessing about its future direction.

City professionals expect BP to address several vital questions this afternoon. What it says will not only shape its future for the rest of the decade, but could also influence the London stock market's mood.

The most obvious question will be the future of the dividend. Mr Horton's departure is thought to have been sparked both by his abrasive management style and by boardroom differences over dividend policy.

It is widely believed that Mr Horton had argued in favour of maintaining the dividend, while others thought it should be cut.

Since his sudden resignation the majority view among City analysts has been that BP will announce a cut of up to 50 per cent in its quarterly payout to 2.1p a share. There are even suggestions it may decide to pass the dividend to stem a massive cash outflow.

The company is not expected to generate sufficient profit this year to maintain its annual dividend bill of pounds 900m. It is also saddled with an pounds 8bn debt mountain, representing around 80 per cent of net assets.

In addition, BP is struggling with a massive cash outflow which for the second year running is expected to amount to more than pounds 1bn.

Not surprisingly the market, as well as many of BP's half-million shareholders, is awaiting today's figures with baited breath.

Fears about a dividend cut have led to a 40 per cent slump in BP's shares in the past 12 months. Yesterday they closed at 206.5p.

The minority who believe that BP will hold its dividend say that although the company's debts are likely to stay high for some years its earnings should improve sharply from 1993. A stable cash position and an accelerated disposal programme, which has generated more than dollars 1bn for each of the past three years, could also enable BP to defy the sceptics.

Lord Ashburton and David Simon, BP's new chairman and chief executive respectively, are under pressure from some institutional investors to maintain the payout. Since its formation in 1909 BP has cut its dividend only once, during the First World War.

Within the group this legacy is a matter of great pride and has cemented its reputation among its institutional investors.

A cut would not only run counter to its long-standing pledge to deliver real dividend growth annually. It would represent a loss of prestige for the world's third-biggest oil company.

Whatever its decision on dividends, BP is under immense pressure. Racked by a weak oil price and dollar, with demand depressed because by recession and a high level of debt, its half-year results are expected to be awful.

Jeremy Hudson, oil guru at Lehman Brothers, is forecasting net profits - excluding oil stock values - of pounds 155m for the half- year to 30 June against pounds 834m for the same period last year. But City forecasts are uncertain because the group is expected to make massive write-offs against restructuring costs and falling asset values.

If some of the market's worst fears come true these could push BP into a significant first-half loss. There have been suggestions that this could be as high as pounds 800m, with a write-off of about pounds 1bn.

Though colossal, restructuring charges of this scale are nothing new in the industry and it is conceivable that BP may decide to take such a hit. Just three weeks ago Amoco revealed an dollars 800m provision against restructuring.

Other US oil majors have taken similar steps in recent months. Yet, despite financial problems of their own, none of them has yet announced a dividend cut.

BP may also give a clue today about how it is reshaping itself, especially its ailing chemicals division. So far it has given priority to boosting asset disposals and reducing capital expenditure.

Steve Ahearne, BP's finance director, told analysts recently that the company would return to a cash-neutral position by next year.

Although some of the uncertainty will be removed today, whether or not the dividend is cut, the shares are likely to experience volatile trading activity in the next few days.