Forbes – At the start of the year, even before big oil and gas companies were clobbered by the global coronavirus or Covid-19 downturn and the short-lived OPEC+ price war, energy market sentiment wasn’t exactly robust. However, what has unfolded in the last eight weeks has ensured confidence in the sector is rock bottom.
The next few trading sessions are likely to bring the sector’s health into sharp focus as a string of Big Oil earning declarations are on the horizon. Given current the current economic climate, investors are more or less braced for awful figures. But the big question for Big Oil is will dividend cuts follow? Such payouts totaled over $40 billion in 2019, according to Refinitiv Datastream.
For Norway’s Equinor, the answer is yes. The company surprised the market on Thursday (April 23) by becoming the first oil major to cut its dividend, slashing the first-quarter payout by two-thirds, even before publishing its latest financials.
On Tuesday (April 28), BP will be the first major to publish its financials and reveal its dividend position. It will be followed by Royal Dutch Shell on April 30, ExxonMobil XOM and Chevron CVX on May 1, Total on May 5, and Equinor itself on May 7.
Dire oil demand has ensured a dire price environment for all. Brent and WTI futures are down 68% and 74% respectively since the start of the year at the time of writing (April 27, 8:25am EDT), and the latter contract hit negative prices on April 20 for the first time in its history.
And even before the full extent of the demand decline and price rout has become apparent, the big five oil majors – led by ExxonMobil and Shell – have announced spending cuts in excess of 20% on an annualized basis.
Many are confronting the harsh reality of trying to make money and honor dividend pledges in a brutal business environment of sub-$20 per barrel oil prices. Multi-billion projects have been put on hold, production has been slashed globally and refining assets are running at much reduced capacity.
In the overall scheme of things a dire Q1 2020 for Big Oil will neither come as a surprise nor will it be relevant. The key thing to watch out for would be the outlining of strategy by different oil and gas majors in terms of coping with the near-term demand decline for Q2, and a possible, gradual recovery in 2021.
As for payouts, based on past history Big Oil company boards have held back from cutting dividends during previous crises. For instance, Shell has never failed to pay a dividend since the Second World War. Indications are this won’t change, for it has lined up over $20 billion from the debt market in recent weeks.
The Anglo-Dutch company’s fierce U.S. rival ExxonMobil has done likewise by issuing $18 billion of bonds in March and April. Problem for some majors, especially BP, is that their debt levels in are already pretty high. More specifically, BP’s gearing – a measure of debt to equity – has remained above target and it recently hiked its dividend to the surprise of many.
Investors can sense higher debt levels being a cause for concern. It is why dividend yield – i.e. ratio of the dividend paid to the share price – of the big 20 international oil companies (IOCs) has rocketed to its highest level in 20 years during the ongoing oil price crash and the slump in IOC share prices over a dire first quarter of the year. The uptick implies investors see a higher degree of risk to a company’s dividend.
All things considered, based on my examination of past financials it appears that Shell and ExxonMobil dividends and 12-month dividend outlook appears stable backed by a strong enough balance sheet. However, BP, Chevron and Total could introduce some form of dividend cuts, if not in Q1 then certainly over Q2 when full consequences of dire fuel demand from travel restrictions and coronavirus lockdowns around the world would be felt.
Most majors were gearing up for a $30 per barrel break-even by 2025-30 in the wake of the 2015-16 oil market downturn with current requirements lurking well above $40. However, such optimization largely hinged on refining and retail operations, i.e. downstream, to offset weaker revenue from oil production or upstream.
The current crisis has entailed a supply glut in tandem with demand slump hampering, at least over the near-term, plans for a lower break-even with both upstream and downstream ends of the business facing an extreme financial squeeze. Something has got to give on the dividend front in the interest of cash conservation – if not wholly at least partially, if not over the Q1 earnings season, then certainly when Q2 season comes around.