Should Transocean, Halliburton and Anadarko Be Paying Dividends? (BP-related)

Great Debates
1

As fellow Dopers may be aware, BP Plc has come under pressure from some U.S. politicians to halt dividend payments in view of the disaster at its Macondo well in the Gulf of Mexico. At the same time, Transocean Ltd., Halliburton Co. and Anadarko Petroleum Corp. – three companies involved in the debacle – have their own plans in place to make dividend payments.

The question before the house: Without meaning to minimize BP’s involvement or excuse its responsibility in any way, should Transocean, Halliburton and Anadarko be paying out dividends at all in the current circumstances?

I can see that one might argue to excuse Transocean and Halliburton for now because no proof of their culpability has come to light, not that I would agree. But Anadarko is one of BP’s two partners in Macondo - should it not be coming under pressure to contribute to the escrow fund that the White House reportedly wants set up?

And in any case, I would certainly imagine that the roles of Transocean and Halliburton will be scrutinized in investigations of the accident, and it’s possible that either or both may be found to blame to some degree. In that light, should Transocean or Halliburton be paying out dividends now?

The details are as follows: Transocean is in the midst of a plan to return $1 billion to its stockholders, see the 25 May and 16 February announcements on its website. Halliburton declared a quarterly dividend of 9 cents a share on May 19 (a month after the explosion on the Deepwater Horizon rig) that’s scheduled for payment on June 22. And Anadarko declared a 9-cent dividend on May 18 that’s due for payment on June 23.

Just to remind everyone, Transocean was Deepwater Horizon’s owner and operator; BP and its Macondo partners, Anadarko and Mitsui & Co., were leasing the rig; and Halliburton was the contractor responsible for cementing the well.

2

That’s exactly where I would fall out on this. I see no reason why Transocean and Halliburton should need to cease paying dividends. They are not the responsible parties here and had broad indemnifications from BP. Anadarko should likely be holding on to as much cash as possible. They are really the party I worry the most about. While their pockets are deep, they are nothing compared to BP. From a simple fiscal responsiblity standpoint, Anadarko should not be paying dividends.

3

The escrow account isn’t designed to sequester money per se (the amount mentioned in the news isn’t going to cover the damages). It’s function is to establish a 3rd party arbitration process.

4

Transocean doesn’t pay a dividend. At least not one that I’ve ever received. And as a shareholder I say hell ya, I’d love some of that $1billion. I received a notice last week that there is a class action lawsuit in the works on behalf of people that bought RIG between a certain period just before the accident.

Halliburton only offers 1.5%

Damn, BP’s is up to 10.96%, that’s some sweet action.

But then what’s the point of denying shareholders a few cents per share of a stock that dropped 50% in 6 weeks?

5

Based on my (admittedly incomplete) knowedge of drilling partnerships, I don’t know if Anadarko and Mitsui have much exposure. In most cases that I know of, the operating partner (in this case BP) does the vast majority of the engineering for the well, and this is more or less standard practice. Unless there is some evidence that Anadarko and Mitsui had a significant role in the development or review of the engineering plan, seems like their liability would be minimal. Anadarko may want consider kicking in a goodly chunk to the escrow fund as a good-will gesture.

Where Anadarko would want to be concerned is in having a significant chunk of its assets in deep water, without the ability to conduct exploration activities for some undefined period.

Right now, it looks as though Halliburton is likely to be in the clear. The documents released so far seem to indicate that they proposed more conservative casing and cementing practices than what BP chose to implement.

Regarding Transocean, it’s not yet clear how big a role equipment under their direct control had to do with the blowout and spill, and thus how large their exposure to liability may be.

I don’t have any direct investments in any of these outfits, so I’m just an semi-interested spectator.

6

I think you have the question all backwards. Obama saying that BP should not pay its dividend is just a completely asinine thing to say. Saying that that sentiment should be extended to everyone else involved just multiplies the asininity.

7

I would question whether paying dividends is the fiscally responsible thing to do. BPs finacnial exposure is pretty uncertain but also pretty certian to be very high. It would seem prudent to mnaintain your reserves in some form or another instead of paying out dividends. Of course paying dividends sends a message about the supposed strength of the company, but I am not sure that is really going to accomlish anything.

8

If it does turn out that the Transocean manager caved to pressure from the BP manager then they screwed themselves in this respect. They essentially turned their liability responsibilities over to BP who then cashed them in.

9

Right, as I understand it Andarko was the exploration company and its revenue interest in the well is more of an annuity type thing – I’d be surprised if they had much at all to do with the engineering. And you make a good point about their other deepwater interests being negatively affected but (1) they aren’t only an offshore or deepwater company; and (2) a lot of their significant deepwater activity is in places like Brazil and Ghana, where the moratorium won’t bother them.

10

I agree with Rand Rover.

Unless it seems obvious that any of these companies will not be able to cover their potential liability because they are choosing to pay out dividends instead, telling them how to allocate their funds is just bizarre.

I have yet to hear anyone explain why they shouldn’t pay dividends in a way that makes any kind of sense. Should they also give employees a pay cut? Just because, you know, they’re evil companies and so they shouldn’t spend money, or something?

11

Their interest in no way resembles an annuity. They were a 25% working interest owner in the well meaning that they are responsible for 25% of the costs. It is highly likely that they will be responsible for 25% of the cleanup costs. Their exposure on damages is much less certain, but you can be sure that they will be named on thousands of lawsuits and that they will pay a substantial portion of the economic damages although probably not 25% of them.

12

BP will fight their damage liabilities with very powerful and connected lawyers. They will not just serenely pay all damages. They will leave a lot of people broke and with no prospects to continue their lives as they lived them before.
Exxon only fought in court for a couple decades . Many of the people in their suits died before resolution was reached. The damages were cut over and over by the judges until they escaped 90 percent of the original damages .
Does anybody think BP will be different?
So people are angry at the oil companies. They are certain that the people will wind up getting thoroughly screwed in the end. So it is natural for them to resent BP going on with business as usual.

13

I assume lots of SD readers have 401 (K) accounts, pension funds, etc. They invest in stocks. For long-term holdings, a major chunk of any gains comes from reinvesting dividend payments. Are people seriously saying that we should now also screw over all 401(K) holders that have already suffered a massive drop on the actual stock itself?

Telling BP not to pay dividends just, because, you know, it’s a bad comapny and all…sheesh. This just might be one of the stupidest things I’ve heard in a long, long time.

14

Do you not understand how a dividend works? If BP pays out the dividend then their company will be worth less (obviously) and the stock price should decline by an appropriate amount. Paying out a dividend or not paying one out should not affect the value to the stockholder.

15

Imagine you were drunk and drove into a group of schoolchildren. While awaiting a civil suit from the parents should you be able to give your assets away?

16

Why the fuck not? They owned a share of the company. They would have benefited if the well produced lots of oil, so they should expect to suffer losses when the company fucked up. Who else should be responsible for the money: the shrimpers, the US taxpayers?

ETA: on the radio I heard a British stockholder whine that if he were in the US he could get damages for the drop in the stock value.

17

If you have large liabilities it’s immoral to disburse funds needlessly and then possibly go bankrupt. IANAL and I don’t know (or care) if it’s legal … but the moral case should be clear to anyone who hasn’t been corrupted by Bush-Limbaughism.

You can bet the right-wingers would grasp the point if, instead of BP moving a billion dollars of cash of its assets real quickly, it was some “welfare mama” buying trinkets for her grandkids to help her qualify for financial help for an appendectomy.

18

I see others have answered DragonAsh. I just want to comment that his post may exhibit that elegant property made famous in Gödel’s Incompleteness Theorem.

19

Sorry, I forgot about this thread.

Yes, I do. Do you know how dividends work? Assuming all other things equal, would you rather own a stock that paid, or didn’t pay, a dividend? Which stock do you think would be worth more?

Whether a company pays a dividend or not very much affects the value of the stock to the stockholder. As I noted previously, many people may own BP without even being aware of it (such as via pension funds and the like). And BP shareholders have already taken a hit (by the decline in the value of the shares they own).

Secondly, let’s look at your other assumption: that a company is worth less if it pays out dividends. You’re probably equating “cash outflow = reduced value of the firm” - but that obviously doesn’t make any sense. If the company spent $100mn to buy a factory that would generate $300mn in profits over the next three years, clearly the cash outflow would increase the value of the firm.

Let’s suppose the company makes $100mn in profit. The company has severeal choices of what to do with that money: For example, it could invest in some capital investment project. It could pay down debt, or it could keep the funds as cash, or it could pay dividends.

What a company decides to do depends on several things, including its capital structure, its view of interest rates, what projects are available to it, etc. But in general, as we saw above, companies that pay steady dividends are usually worth more than companies that either don’t pay dividends or has a spotty dividend payment track record. If a company could, but doesn’t, pay dividends, it may find it harder (or more expensive) to raise money from stock, and instead it might be forced to depend only on debt. Perhaps it has to abandon some profitable projects because it can’t raise the intial startup funds. Or perhaps it can’t complete an M&A deal, etc.

If BP is strapped for cash, and the question is, “should BP pay dividends or take care of the potential liability”, then yes - BP should obviously focus on ensuring it has cash on hand for the potential liabilities. But I don’t see anyone making that argument here. I agree it’s a disaster of massive proportions - but this kind of kneejerk reaction is just silly. I mean, I didn’t see anyone shouting that Toyota shouldn’t be paying dividends.

If you have no evidence that BP, if it paid out dividends, would be unable to pay its liabilities and would be on the verge of bankruptcy, then yes - saying BP shouldn’t pay dividends, because it’s, you know, evil and all - is teh stupid.

20

Whether or not a company pays dividends does not factor into the value of their stock. If I want a liquidity event, I could simply sell some of the stock rather than depend upon the company to pay out a dividend. If a company has no other useful purpose for the money, then they should pay a dividend. As a general rule, more mature companies pay dividends.

If you own a 100 shares of a company that is worth $100 and you are the sole shareholder then each share is worth $1. If the company pays out $0.10/sh dividend than that company is now worth $90, your stock is worth $0.90/sh and you have $10 of cash. How again does paying out a dividend affect the value to the stockholder? The only impact it has is on taxes and reinvestment risk.

What’s your point with this? Sure people own BP and may not know it. Their shareholders rightfully took the hit. That’s part of having an equity ownership in a company.

Paying a dividend is in no way comparable to buying an asset. There should be no immediate change to a company’s net worth after buying an asset. That paying a dividend reduces the value of a company is absurdly self-evident. It is going to directly reduce the net worth of a company by an amount exactly equal to the amount of the dividend. That’s basic accounting.

No argument.

No, generally more mature companies pay dividends. Google has never paid out any dividends and has stated that they do not intend to pay any dividends for the foreseeable future. That didn’t hurt their ability to raise additional capital through one of the largest secondary offerings in history a few years ago. Microsoft didn’t pay out any dividends until 2003.

When the future liabilities are still difficult to quantify and will have a materially adverse effect on the company, it is prudent to suspend dividends. BP just met with a sovereign wealth fund today about potentially raising capital. How would it possibly make any sense to pay out a dividend when you also are looking to raise capital? Further, you do realize that BP’s stock rose after it announced that it was suspending its dividend payments for the rest of 2010 don’t you?