Now that oil prices have plummeted to six-year lows – lower than the bottom oil prices touched earlier this year – everyone is starting to wonder whether or not the juicy dividends offered by some of the largest oil and gas companies are sustainable. After all, how can such generous levels of payouts survive a 60 percent drop in oil prices?
There are several ways that oil companies can correct the hole in their balance sheets, aside from boosting revenues through higher production: cut costs, issue new debt and equity, sell assets, or cut the dividend. Since dividends have been considered sacrosanct, the industry has turned to the other options to a very large degree. However, if oil prices stay low, oil companies may soon have to consider their dividend payouts, a once unthinkable concept.
A Sea of Red Ink
For much of the rest of the industry, and especially the larger companies, protecting dividends is a high priority. Instead, cuts to capital spending, selling off assets, and issuing new debt have been preferred.
The oil majors alone have cut spending by $60 billion this year, and slashed thousands of people from their payrolls. But the double-dip in oil prices will likely spark a fresh round of cuts – as much as $26 billion might need to be shaved off in the coming months.
But even that might not be enough.
Asset sales could accelerate. Total (NYSE: TOT) just announced another wave of asset selling, shedding holdings…