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The relentless drop in oil prices has forced many energy companies to cut back, sometimes drastically, on capital spending. But few if any of these corporations have had to resort to cutting shareholders’ dividends – until now.
London-based Tullow Oil, which specializes in exploring and drilling for oil in Africa, announced Feb. 11 that its dividend for the fourth quarter of 2014 will be suspended because of a $2.87 billion pretax loss, and that it’s also found ways to reduce capital expenditures by $500 million.
As the price of crude has lost more than half its value during the past year, similar and even greater losses have plagued larger oil companies such as Norway’s Statoil, Britain’s BP and ExxonMobil of the United States. But these corporations are rich enough to find the cash to pay dividends to their investors.
Tullow is an exception. “We think [suspending the dividend] is the sensible thing to do to create financial flexibility,” the company’s CFO, Ian Springett, told Reuters, noting that this action alone will save it $180 million. “We will look at the dividend again as market conditions allow.”
And the damage may not be limited to Tullow. It’s not the only medium-size or small energy concern that lacks the resources of the major oil companies, and others may have to follow Tullow’s lead as they report earnings in the coming weeks.
“Unfortunately dividends are a luxury and you need that [financial] headroom,” Tullow CEO Aidan Heavey told The Wall Street Journal. “We took a decision to reset the business and streamline it to work at a lower oil price.”
As a result, Heavey said in a statement, “we … are focusing our capital expenditure on high-quality, low-cost oil production in West Africa.”
Energy companies that rely on exploration are exceptionally vulnerable to swings in oil prices. Ordinarily they borrow money for exploration, which is costly, then pay back the loans with proceeds from oil they’ve discovered – if oil is discovered.
Like other British oil-exploration companies, Tullow had a losing streak in exploration even before crude prices began to decline in June 2014 as its debt increased and its wells turned up dry. Investors shed the company’s shares, which lost about half their value in the past year.
Now Tullow has decided to reduce spending on exploration drastically from about $1 billion to $200 million, and it will shun exploration for the time being, focusing only on existing fields with known oil yields.
In particular, Heavey said, Tullow will finish work on its $4.9 billion Ghana TEN development, a promising oil deposit which is expected to begin production in the middle of 2016. Springett said the company has enough cash on hand to complete the project without seeking more loans.
By Andy Tully of Oilprice.com
Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com