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BP's Big Dividends Come With Costs


Paying out cash is a crowd-pleasing strategy for companies, but they need to be sure they can afford it.

BP’s


BP 3.76%

incoming boss may need to give more thought to the oil-and-gas industry’s future than the outgoing one.

BP delighted investors on Tuesday with results that beat analyst forecasts and a dividend increase. The energy giant also reiterated its 2021 targets. The shares were up 4.5% in early trading.

But the results were flattered by $9.4 billion of divestments in the year and a lower-than-expected tax rate: It was 27% for the fourth quarter, taking the annual rate down to 36%, compared with a recent average of closer to 38%. Meanwhile, increasing the dividend limits BP’s room for maneuver now and into the future—a high-risk strategy in an industry that is wrestling with how it fits into a lower-carbon economy.

BP and its peer

Royal Dutch Shell

are anchors of the FTSE index, prized for their reliable dividends and rewarded for increasing those payouts. Both companies, however, also need to start investing to adapt their business to a world where demand for their current products will fall.

The sector’s low valuations, despite recent improvements in cash flow and cost discipline, indicate that investors expect changes in the industry. Shell is currently ahead of its rival in planning for greener times.

Bernard Looney

takes over as BP’s new chief executive on Wednesday. He must both develop a new strategy to cope with a lower-carbon economy and reduce the company’s so-called gearing ratio—a closely watched measure of net debt as a percentage of total capital. BP’s gearing at the end of the year was 31.1%, up from last year and the highest in its peer group. It reconfirmed its goal for gearing in the mid-20s this year.

Outgoing Chief Executive

Bob Dudley

defended the dividend increase on the basis that BP is on track for its 2021 targets, capital expenditures are at the lower end of its range and there are plans to sell another $5 billion worth of assets by mid-2021. The company also expects to collect around $7 billion in cash this year for divestments agreed in prior periods, and payments from the Deepwater Horizon disaster will fall to less than $1 billion after tax from 2020.

Investors’ initial response has been to cheer, but the mood may not last. Mr. Looney is due to give his thoughts on BP’s future in a strategy update next Wednesday. At that point the cost of Mr. Dudley’s generosity may become clearer.

Write to Rochelle Toplensky at rochelle.toplensky@wsj.com

Corrections & Amplifications
BP’s gearing ratio at the end of 2019 was 31.1% An earlier version of this article incorrectly stated the ratio was 31.3%. (Feb. 4, 2020)

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