• 50 mins OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 2 hours London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 3 hours Rosneft Signs $400M Deal With Kurdistan
  • 5 hours Kinder Morgan Warns About Trans Mountain Delays
  • 12 hours India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 17 hours Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 21 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
  • 6 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
  • 7 days Oil Throwback: BP Is Bringing Back The Amoco Brand
  • 7 days Libyan Oil Output Covers 25% Of 2017 Budget Needs
Alt Text

This Key Data Points At Strong U.S. Oil Demand

U.S. Gasoline prices haven’t risen…

Alt Text

The New Challenger To Lithium Batteries

The lithium-ion battery is head…

Alt Text

How Vulnerable Is The Electrical Grid?

Hurricane Maria knocked out the…

Why Dividends Are Still A Must For Big Oil

Offshore oil platform

The big oil companies—at least in this oil price environment—have come under a lot of criticism for their decision to generate cash flow rather than focus on return on equity. Much has been discussed about the dividend-paying capabilities of the companies, as that they have dished out dividends that have often exceeded their earnings.

Is this a sound strategy, and should investors continue to hold onto the big four stocks?

The big four oil company’s dividend payout in 2015 was more than 100 percent of their profits. The situation got worse in 2016, when Exxon ponied up a whopping $3.1 billion in dividends for Q2, against a net income of $1.7 billion, according to S&P Global Market Intelligence. The gap was likely filled by taking on debt.

The net debt of the big four oil companies; Exxon Mobil Corp., Royal Dutch Shell PLC, BP PLC, and Chevron Corp, has more than doubled in the last two years.

The debt to equity ratio of Exxon is the least at 18 percent, while Shell has the highest gearing of 28 percent, likely to reach 30 percent, according to their Chief Financial Officer Simon Henry. BP is also expected to have a gearing of 30 percent by end 2017, according to Jefferies analyst. For the sake of comparison, in 2012, Exxon’s debt to equity was just 1.2 percent, and Shell’s was only 10 percent; looking back to a decade ago, Exxon had no debt at all.

One could assume that this means that as and when the oil prices rise, the oil companies will be in a condition to once again generate enough profits to pay off the debt, massive as it may be.

Though the companies are resorting to asset sales, job cuts, and other budget cuts to survive the downturn, many have asked why they continue to dish out dividends to their investors.

Globally, more than $9 trillion of government securities yield below zero, according to Bloomberg Barclays index data. In such an environment where investors are scrounging for yields, the big four oil companies offer mouth-watering ones. Exxon has a dividend yield of 3.4 percent, Chevron has a yield of 4.19 percent, BP has a yield of 6.68 percent, and Royal Dutch Shell has a dividend yield of 6.4 percent. Related: OPEC Crude Accounts For Most Of U.S. Oil Imports Rise

This has led the investors to continue holding the stocks of these companies even during such a massive oil rout. If the investors bail and trigger a sell off of these stocks, it would dampen the sentiment towards their stock, and the companies would find it difficult to raise new debt. Hence, taking some debt to continue paying dividends is the smart strategy—and possibly the only strategy—to follow.

“They’re so big, they can diversify, they have more levers to push and pull in terms of shoring up their creditworthiness,” said Wilmer Stith, senior fixed-income portfolio manager at Wilmington Trust, which has $73 billion in assets under management, reports The Wall Street Journal.

The U.S. Energy Information Administration has forecast WTI to average $51 a barrel in 2017, which supports the approach followed by the oil companies.

If crude averages between $50 to $55 a barrel, BP believes that they will not only be able to pay dividends, they can even invest in new operations to search for more oil. Related: Goldman Sachs: ‘Very Oversupplied’ Market To Stop Crude Rally At $55

The recent rebound in crude prices is good news for the oil companies.

“Over the last year, integrated oil and gas companies have accelerated reductions in their operating costs to adjust to earlier oil price declines. As a result, most companies’ upstream operations returned to positive net income generation in the second quarter of 2016, while also benefiting from an uptick in the price of crude,” says Elena Nadtotchi, a Moody’s Vice President — Senior Credit Officer and author of the report, reports Hellenic Shipping News.

Considering the cyclical nature of oil, the approach of the oil companies is correct, but if oil should take a lot longer to recover, then the oil companies may have to rethink their strategy.

By Rakesh Upadhyay for Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • Jack Ma on October 09 2016 said:
    The BIG 4 better replenish their depleted reserves fast!

    There are a few offshore drillers now sitting on paid vacation and waiting. Their balance sheets are fine, but the same cannot be said about the debt financed dividend fools known as the BIG 4.

    Suicide is not an wise option for them long term and so kissing butt today to greedy shareholders is just bad business for all with the low oil markets and a Dedollarization war in play by the BRICS.

    For death to the petrodollar to be death to the BIG 4 would be a burst of a laughter; quite unstoppable until the epitaph of doom.

    IMHO

Leave a comment




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