Big oil dividends are no longer untouchable

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The dividends for the largest oil companies in the world are suddenly not looking as untouchable as they once were.

Hefty payouts from Big Oil are what has made them the darlings of Wall Street for a long time. The oil majors, in most cases, have not reduced their dividends in decades. For investors, companies like ExxonMobil or Royal Dutch Shell not only offer returns on their share prices, but also steady and increasing dividend payouts.

The crash in oil prices is threatening to upend the long-held assumptions about the oil majors. Some companies, even before the plunge in oil prices by more than 70 percent, had struggled to cover both their operational spending plus their dividends from cash flows. Now that prices are down to $30 per barrel, many are definitely cash flow negative.

As a result, since oil executives have routinely said that the dividends will be the last thing to get cut, layoffs and spending cuts have been the preferred option over the past 18 months. But that still hasn’t stopped the bleeding. So the dividend payouts are covered with rising debt.

But they can only keep up that approach for so long. The longer that oil prices stay low, the more fragile the dividend arrangement becomes.

ConocoPhillips just became the second large oil company since the oil price downturn to reduce its dividend, a move that will no doubt send shockwaves throughout the energy investment world. Last year, Italian oil giant Eni was the first to reduce its dividend. In announcing its fourth quarter and full-year earnings, the Houston-based ConocoPhillips slashed its dividend by 65 percent, from 74 cents per share down to just 25 cents.

“The decision to reduce the dividend was a difficult one. The dividend has been, and will continue to be, a top priority,” Ryan Lance, chairman and CEO of ConocoPhillips, said in a statement. “We still intend to provide a competitive dividend, while significantly lowering the breakeven price for the company and substantially reducing the level of borrowing in 2016.” He also said that slashing the dividend will save the company $4.4 billion this year.

The company lost $3.5 billion in the fourth quarter, compared to a net loss of $39 million in the fourth quarter of 2014. For the full-year, ConocoPhillips lost $4.4 billion, a sharp decline from the $6.9 billion profit the company posted in 2014.

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Statoil, the Norwegian oil company, also reported earnings this week, reporting a full-year net loss of $4.42 billion. Statoil’s debt to capital ratio increased from 20 percent to 26.8 percent by the end of 2015. To reduce the drag on cash flow, Statoil decided to offer shareholders the option of taking more shares in the company in lieu of its dividend.

Other large oil companies are also struggling. Royal Dutch Shell reported on February 4, with quarterly earnings falling 60 percent to just $1.8 billion. Full-year profits were down 80 percent from $19 billion in 2014 to just $3.8 billion last year. The upstream unit lost $5.7 billion in 2015 – Shell’s overall performance was clearly aided by its refining division.

Both Shell and ConocoPhillips expect that their reserve replacement ratio will fall by 20 percent, as low prices leave more hard-to-reach oilfields uneconomical. Last year, Shell pulled out of several high-profile projects: the Arctic, a major oil sands project in Canada, and a sour gas field in Abu Dhabi. Shell’s purchase of BG Group, a big bet on natural gas, will boost reserves by around 25 percent compared to 2014 levels.

Despite all the pain, Shell maintained its dividend at US$0.47 per share, appearing determined not to touch the coveted shareholder payout.

ExxonMobil, the largest and most profitable of the oil majors, fared better than its peers but still posted the worst performance in more than a decade. Exxon’s profits dropped by half to $16.2 billion. And in a sign that shareholder payouts are not quite as sacred as they might have been, Exxon cancelled its share buyback plans for the first quarter.

It assured investors that its dividend would not be reduced. But that carries risks during the downturn. ExxonMobil is one of only three U.S. companies with a stellar AAA credit rating (the others are Johnson & Johnson and Microsoft). But S&P just put ExxonMobil on a negative credit watch, and the ratings agency could decide within 90 days to downgrade the company.

The oil majors have posted their worst performances since 1998.

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