• 40 mins Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 2 hours Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 3 hours OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 4 hours London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 5 hours Rosneft Signs $400M Deal With Kurdistan
  • 7 hours Kinder Morgan Warns About Trans Mountain Delays
  • 14 hours India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 19 hours Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 23 hours Russia, Saudis Team Up To Boost Fracking Tech
  • 1 day Conflicting News Spurs Doubt On Aramco IPO
  • 1 day Exxon Starts Production At New Refinery In Texas
  • 1 day Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 2 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 2 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 2 days China To Take 5% Of Rosneft’s Output In New Deal
  • 2 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 2 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 2 days VW Fails To Secure Critical Commodity For EVs
  • 2 days Enbridge Pipeline Expansion Finally Approved
  • 2 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 2 days OPEC Oil Deal Compliance Falls To 86%
  • 3 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 3 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 3 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 3 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 3 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 3 days Aramco Says No Plans To Shelve IPO
  • 6 days Trump Passes Iran Nuclear Deal Back to Congress
  • 6 days Texas Shutters More Coal-Fired Plants
  • 6 days Oil Trading Firm Expects Unprecedented U.S. Crude Exports
  • 6 days UK’s FCA Met With Aramco Prior To Proposing Listing Rule Change
  • 6 days Chevron Quits Australian Deepwater Oil Exploration
  • 7 days Europe Braces For End Of Iran Nuclear Deal
  • 7 days Renewable Energy Startup Powering Native American Protest Camp
  • 7 days Husky Energy Set To Restart Pipeline
  • 7 days Russia, Morocco Sign String Of Energy And Military Deals
  • 7 days Norway Looks To Cut Some Of Its Generous Tax Breaks For EVs
  • 7 days China Set To Continue Crude Oil Buying Spree, IEA Says
  • 7 days India Needs Help To Boost Oil Production
  • 7 days Shell Buys One Of Europe’s Largest EV Charging Networks
Alt Text

OPEC Looks To Permanently Expand The Cartel

OPEC Secretary General Mohamed Barkindo…

Alt Text

Trump’s Iran Decision Haunts Big Oil

Donald Trump’s Iran decision has…

John Manfreda

John Manfreda

John majored in Pre-Law at Frosburg State Universtiy and received his MBA at Trinity University. He has co-authored The Petro Profit report and dividend stock…

More Info

Are Big Oil’s Dividends Sustainable?

Are Big Oil’s Dividends Sustainable?

Most investors have been attracted to the oil and energy industry due to its history of paying out large dividends. Blue Chip oil stocks have been known to possess management teams that are financially prudent, and shareholder friendly. This is why companies such as Chevron, ConocoPhillips, and ExxonMobil, have garnered much attention in the investment community. But, due to the large decline in the oil price, most investors are now wondering whether or not these dividends are sustainable.

To answer that question, one has to first realize that it all depends on how long this price environment lasts. If oil prices stay low for 5 or 6 more years, then the current dividend arrangements are certainly not sustainable. But, oil prices below $45 per barrel are also unsustainable.

For evidence of that, one just needs to look at Saudi Arabia’s treasury burn rate. A burn rate is the rate in which an entity is losing cash, or decreasing its cash reserves. For Q1 of 2015, Saudi Arabia posted a burn rate of $16 billion dollars. For the year, one must assume Saudi Arabia’s average burn rate would be around $60 billion dollars a year. Related: Energy Investors May Have A Long Wait Ahead

Dating back to June of 2014, Saudi Arabia’s treasury contained a cash reserve of $750 billion dollars. Currently, it has an estimated burn rate of roughly $60 billion dollars a year. Theoretically, Saudi Arabia can maintain this low oil price environment for up to 8 years. But in reality, they wouldn’t want to burn all of their reserves, especially when government expenditures are increasing. As an example, for this year, educations expenditures have increased by 3 percent, health and social affairs expenditures have increased by 48 percent, and military spending has increased by 18 percent.

As a result, Saudi Arabia will probably only be able to realistically wage their war for market share for roughly 1 or 2 more years. This is due to the fact that expenditures are rising, and over 80 percent of government revenue is derived from oil exports, so Saudi Arabia can’t afford this low price environment for much longer.

But how long can ExxonMobil, Chevron, and Conoco Phillips maintain their dividends if these prices persist over the next 2-3 years?

Let’s explore 3 internal factors: the strength of each company’s balance sheet, the company’s dividend payout ratio, and the company’s cash flow.

Chevron- In order to calculate Chevron’s cash flow, I added its operating cash flow plus depreciation, depletion and amortization (DD&A), and that equated to $17.6 billion dollars. I added DD&A, because that expense was already paid for, and doesn’t contribute to a cash burn. Then I subtracted its CAPEX, which equated to $17.3 billion dollars. Related: Where Is Oil Heading? New Reports From IEA, OPEC, And EIA Provide Clues

So far, the company is cash flow positive of $300 million dollars, based on numbers from its investor report. In terms of its dividend payout ratio, its payout ratio is over 100 percent, which is very high. Its balance sheet is strong with a current ratio of 1.4, based on numbers from google finance, a quick ratio of 1.01, and total assets/total liabilities ratio of 2.3.

This equates to a strong balance sheet. I believe over the next year, the company’s cash flow and balance sheet strength could enable it to maintain its dividend, especially since its high liabilities to asset ratio allows Chevron to sell off non-core assets in order to pay off future liabilities or payout current dividends. But its high payout ratio does expose itself to a dividend cut, if these prices persist for another 2 plus years.

Exxon Mobil- For Exxon, I calculated them to be cash flow positive by generating over $11 million dollars in cash flow from current operations. In terms of its balance sheet, I calculated a current ratio of .88, a quick ratio of .52, and a total asset to total liability ratio of 1.9. Its dividend has a payout ratio of 70 percent. Based on these numbers, I think a dividend cut could occur within the next year, but due to its large refinery business, it can remain cash flow positive for the next several years. But over the next 2-3 years, if these prices persist, a dividend cut would occur, due to some balance sheet weakness, and high payout ratio. Related: Better Times Ahead For Oil, If You Can Believe It

ConocoPhillips- Currently, ConocoPhillips has a high payout ratio of over 1,000 percent. This is solely due to low oil prices. This payout ratio can be misleading, because unlike Chevron and Exxon, ConocoPhillips is mostly an exploration and production company, and not a vertically integrated company with a downstream refinery segment. This means that its income can increase and decrease at a much more drastic rate then Chevron or Exxon.

In terms of cash flow, ConocoPhillips generated a negative rate of $500 million dollars in cash flow, on a year to date basis. Its balance sheet is relatively strong, posting a current ratio of 1.4, a quick ratio of 1.02, but its total assets to total liabilities ratio only posted a number of 1.76. Based on balance sheet strength, I do not believe a dividend cut for ConocoPhillips would occur this year, but if these prices do persist for another year, then ConocoPhillips would be forced to make a dividend cut in my opinion, due to its high payout ratio, and weak liabilities to asset ratio number.

By John Manfreda For Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • paul aumuller on August 17 2015 said:
    The question is not whether dividends are sustainable, the more acute question is whether the current level of sustainability of oil companies avoids bankruptcy.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News