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Something Has To Give – Goldman Sachs Expects More Dividend Cuts

It hasn’t been a great week for Big Oil. BP reported an 80 percent decline in earnings, and ExxonMobil lost its coveted AAA credit rating, which it has held uninterrupted for more than eight decades.

Low oil prices are still wreaking havoc on the industry, hollowing out profits and forcing companies to cut back on spending and personnel. It is a sign of the times that BP’s $532 million net profit – which excludes nearly $1 billion in fresh charges from the Deepwater Horizon disaster way back in 2010 – beat analysts’ estimates and was considered a very positive result. BP’s share price jumped more than 5 percent on April 26 following the results.

But the oil majors are still hurting. And it is unclear whether or not they can maintain their generous dividend policies. BP’s dividend yield now exceeds 7 percent and Royal Dutch Shell has a similar payout. Related: Are Oil Dividends Worth it?

Goldman Sachs’ global head of commodities research, Jeff Currie, says that the majors could struggle to hold onto the generous payouts if oil prices stay low.

"Obviously if we stay in a $50-to-$60-type price environment most of these companies have embedded in their outlooks, it's going to be very difficult to actually make those types of dividend payments that were structured in the previous era,” Currie said on CNBC’s ‘Fast Money: Halftime Report.’ He says the dividends made sense when oil prices were well above $100 per barrel, but with crude trading for under $50 per barrel, the payouts are unsustainable. Related: Why The Saudi Aramco IPO Will Not Be Enough

Cowen and Co. predict that the current strategy for the majors can last until the end of next year. According to CNBC, the investment bank said "operational efficiencies, cost reduction, and asset sales should allow [integrated oil companies] to sustain dividends and bridge the funding gap through 2017.”

But cash flows are not covering spending and dividends – something has to give. For now, the majors are stubbornly holding on to their dividends, arguing that the combined effect of cuts to capex and payroll, deferred investment, and operational efficiencies, will be enough to hold them over until oil prices rebound. That remains to be seen.

Charles Kennedy of Oilprice.com

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  • Retech on April 27 2016 said:
    Wasn't Jeff Currie the same analyst that said crude would be 'lower for longer' and that oil would drop below $20/barrel?

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