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Dividend Cut Risk of The 6 Oil Super Majors


Oil prices have collapsed from highs of ~$120 per barrel to lows of ~$30 per barrel.

Oil Prices
Source: Finviz

Tumbling oil prices have caused real problems for the oil industry. Marginal oil companies are facing solvency issues and are having to slash dividends.

But what about the kings of the oil and gas industry – the 6 super major oil and gas corporations – are they also likely to cut their dividend payments?

The 6 super majors are listed below:

Of the 6, ExxonMobil is the largest. The image below shows the respective market caps of all 6 super majors to get an idea of their relative sizes.

Super Major Market Cap

The super majors all have enviable dividend yields – especially when compared to the S&P 500’s current dividend yield of 2.2%.

The lowest yielding super major has a 3.8% dividend yield – a full 1.6 percentage points above the S&P 500’s dividend yield.

The highest yielding super major is Royal Dutch Shell with its 7.8% dividend yield. BP is not far behind with a 7.4% dividend yield.  You can see the full list of high dividend stocks with 5% yields by downloading the free excel sheet below.
 

If the super majors are able to pay steady or increasing dividends, they are absolute bargains at current prices.

If, on the other hand, they will soon be cutting their respective dividends, then they are nothing more than fool’s black gold.

This article examines the likelihood of a dividend cut as well as the respective investment merits of each of the 6 super majors.

Chevron

Chevron is the second largest super major, and has the second lowest yield of the 6 at ‘just’ 5.0%.

Chevron is a Dividend Aristocrat (along with ExxonMobil); Chevron has paid increasing dividends for 28 consecutive years. Click here to see a list of all 50 Dividend Aristocrats. The image below shows the company’s dividend history over the last 45 years.

CVX Dividend History

Chevron’s long history of dividend increases shows that the company is committed to paying rising dividends.

The company’s management has been very clear about its commitment to dividends as the image below from the company’s most recent earnings presentation shows:

Chevron Dividend Committment

The will to pay increasing dividends is very important for a management. Without it, the dividend is one of the first capital outlays to be cut when times get tough.

During the financial crisis of 2007 to 2009, oil prices dropped precipitously.   The company’s earnings fell by 55%. Despite this, Chevron did not cut its dividend.

In 2015, Chevron saw cash flow from operations decline:

Chevron paid out $8 billion in dividends in fiscal 2015, and ~$30 billion on capital expenditures. To make up the difference in cash flow from operations and capital needs, Chevron divested assets and issued new debt.

Chevron Cash Flow
Source: Chevron Q4 2015 Presentation, slide 5

Chevron’s total capital needs including all expenses and dividends in 2015 was $69 billion. The company is expecting to need around $60 billion in 2016. Here’s where this money will come from under different oil price scenarios:

If oil prices average $50 or above in 2016, Chevron will not have a cash shortfall.

Cash shortfalls that must be funded by new debt issuances or the company’s cash on hand at different oil price levels are shown below:

Chevron currently has around $11 billion in cash on its balance sheet. The company has is carrying $38.5 billion in debt as well. Chevron has an AA credit rating from S&P and an Aa1 rating from Moody’s. Chevron should have little problem issuing new debt at favorable interest rates in 2016 if oil prices remain low.

It is likely that Chevron will have to raise some money through debt issuances in 2016 – probably in the range of $5 billion (expecting around $40 average oil prices for the year and the company not using all its cash reserves).

Chevron has the ability to continue paying its dividend in 2016. The company’s balance sheet and credit rating are still strong. Additionally, the company’s management appears committed to paying steady or increasing dividends. It is very unlikely Chevron has a dividend cut in 2016. With that said, if oil prices stay in their current range for years then Chevron would eventually be unable to pay its dividend.

ExxonMobil

ExxonMobil is the largest oil corporation in the world based on its market cap. The company is also a Dividend Aristocrat with 33 years of consecutive dividend increases. ExxonMobil and Chevron are the only 2 oil corporations that are also Dividend Aristocrats.

XOM Dividend History

ExxonMobil is one of the best stocks for DRIP investors thanks to its long dividend history, high yield, and no-fee DRIP.

ExxonMobil’s power and influence on a geopolitical scale should not be underestimated. The company’s close ties with both the United States government and international governments combined with its enormous size give it a strong and durable competitive advantage.

Despite steep declines in oil prices, ExxonMobil is still profitable thanks to its diversified operations. The company’s chemical and downstream operations generated $2.3 billion in profits in the company’s most recent quarter. Even with ultra-low oil prices, ExxonMobil’s upstream division generated $0.8 billion in profits in the same quarter. The image below breaks down earnings changes for the company in the fourth quarter of 2015 versus the fourth quarter of 2015:

XOM Earnings
Source: ExxonMobil Q4 Earnings Presentation, slide 7

In total, ExxonMobil generated $0.67 in earnings-per-share in its most recent quarter versus $0.73 in dividends.

Normally, a payout ratio over 100% would be cause for alarm. That’s not the case with ExxonMobil.

ExxonMobil’s management is committed to paying rising dividends, as evidenced by its 33 year streak of consecutive dividend increases.

In addition, 2 out of ExxonMobil’s 3 segments (downstream and chemical) are generating significant cash flows.

ExxonMobil has $3.7 billion in cash on its balance sheet and $38.7 billion in debt. The company’s balance sheet is in excellent shape. ExxonMobil is 1 of only 3 United States corporations with an AAA rating from S&P. The other 2 are Microsoft (MSFT) and Johnson & Johnson (JNJ). An AAA rating is higher than the United States government’s rating – and the government has the power of taxation on its side. S&P has put ExxonMobil on a 90 day watch; the company may lose its perfect credit rating, but would still have an excellent credit rating nonetheless. This means ExxonMobil will have no difficulty tapping credit markets if it needs additional liquidity while oil prices remain low.

ExxonMobil’s combination of the following factors make it extremely likely the company will continue to pay rising dividends through the current low oil price environment:

Shareholders of ExxonMobil should not worry about a potential dividend cut – with that said, dividend increases will likely be very small (in the 1% to 3% range per year) while oil prices remain low.

Royal Dutch Shell

Royal Dutch Shell has ‘A’ and ‘B’ class shares. The ‘A’ class shares’ dividend payments are subject to Dutch tax withholdings of 15% in most cases. The ‘B’ class shares are subject to United Kingdom tax laws and do not have a dividend withholding tax. Unless you feel obligated in some way to support the Dutch government, the B class shares are preferred for most United States investors.

Royal Dutch Shell was created in 1904 when Royal Dutch Petroleum merged with Shell Transport in a move to compete with Standard Oil. Today, Royal Dutch Shell is one of the largest oil coronations in the world with over 90,000 employees spread across 70 countries.

The company reported earnings-per-share of $0.29 in its most recent quarter. Royal Dutch Shell paid $0.47 per share in dividends in the quarter. On the surface, this looks troubling. When one drills down deeper the company’s dividend appears safe.

That’s because Royal Dutch Shell generated $5.4 billion in cash flow from operations in its most recent quarter – and paid dividends of $3 billion. Cash flow from operations are easily covering the company’s dividend. As oil prices have fallen, Royal Dutch Shell has reduced its investing expenditures.

RDS Cash Flows
Source: Shell Q4 Earnings Presentation, slide 20

Notice in the picture above management’s intention to pay steady or rising dividends in 2016. This is a positive sign from management that the company’s dividend is important to them.

Royal Dutch Shell is focusing on streamlining operations and divesting unnecessary projects. The image below shows how many projects the company has recently cancelled or divested to conserve capital.

RDS Projects
Source: Shell Q4 Earnings Presentation, slide 9

While Shell has been postponing and divesting many of its projects, the company is planning a ~$70 billion acquisition of British Gas. Royal Dutch Shell is attempting to take advantage of the decline in oil and gas equity valuations through this large acquisition. The acquisition will be funded with a mix of cash and stock. The British Gas acquisition will result in significant savings through synergies. Royal Dutch Shell plans to divest ~$30 billion in assets from 2016 through 2019, after the acquisition is complete.

Royal Dutch Shell’s cash flows remain strong, despite low oil prices. The company’s cost cutting efforts and commitment to its dividend make it very likely the company will continue to pay steady or rising dividends through the current low oil price environment.

British Petroleum (BP)

BP was founded in 1909 as the Anglo-Persian Oil Company after a massive oil discovery in Iran. Today, BP employees over 80,000 people in around 80 countries.

BP’s strategy as outlined in its latest quarterly report is for low oil prices is to reorganize the business to:

“Our principal objective is to re-establish a balance in our financial framework by 2017 where operating cash flow covers capital expenditure and the current dividend at an average Brent oil price of around $60 per barrel.”

The company’s management is resolute in not cutting its dividend:

“This (the company’s strategy) supports our ongoing commitment to sustaining the dividend as the first priority within our financial framework, and restoring growth in distributions to shareholders over the long term.”

The last time BP cut its dividend was in 2010 due to the Gulf oil spill disaster.   The company’s cash outflows for the spill are decreasing, and a settlement agreement has been reached in principle to settle all federal and state claims. BP is expecting cash outflows of around $1.6 billion in 2016 from the Gulf oil spill.

Like other oil companies, BP is reducing its expenses and minimizing growth capital expenditures to its best ventures. The company is expecting $17 to $19 billion in capital expenditures in 2016. The company paid $6.7 billion in dividends in fiscal 2015, and I expect the same number in 2016 (no increase, but no cut either). Dividends and capital expenditures combined with gulf oil spill costs brings the company’s capital needs to somewhere between $26 and $28 billion in fiscal 2016.

BP generated operating cash flows of $5.8 billion in its most recent quarter. If oil prices remain around the same levels they were over th3 4th quarter of 2015, the company will generate operating cash flows of around $23 billion in fiscal 2016 – around $3 to $5 billion short of what is required. Fortunately for shareholders, BP is planning to divest between $3 and $5 billion in assets in fiscal 2016 – shoring up the company’s capital needs.

BP’s balance sheet is flush with cash. The company has around $26 billion in cash on its balance sheet – enough for more than 3 years of dividends on its own. BP does carry around $53 billion in debt which is fairly high, but the company’s large cash position and positive operating cash flows offset its debt.

Investors in BP will likely continue receiving steady dividends until oil prices move past $60/barrel. When that occurs, BP will likely begin raising dividends. The company’s cost cutting moves and asset divestitures combined with its large cash position make it very likely investors will not experience a dividend cut from BP.

Total SA

Total SA was founded in 1924 when French Prime Minister Raymond Poincare opted to form an entirely French oil corporation instead of entering into a partnership with the British/Dutch Royal Dutch Shell Corporation.

The company was listed on the New York stock exchange in 1991 and has paid a dividend every year since. Total SA’s dividend does fluctuate in dollar terms because the company pays its dividend in Euros.

Total SA is the 4th largest of the super majors, and currently offers investors a very high 6% dividend yield.

Like all oil companies, Total is seeing declining earnings due to falling oil prices. Despite this, Total SA’s dividend is safe.

The company is expecting earnings-per-share of:

The company currently pays $2.64 a share in dividends. Total’s payout ratio will remain well under 100%, despite low oil prices.

Total’s payout ratio in fiscal 2016 is expected to be around 75% of earnings. This is high, but it is by no means overly risky when one considers how far oil prices have fallen.

Total’s conservative payout policy is serving the company well. Total does carry a significant amount of debt on its balance sheet, however. The company currently has $56 billion in debt and pays $1.1 billion a year in interest.

Despite the large number ($56 billion sounds too high), Total SA is in no danger of a liquidity crunch. The company currently has an interest coverage ratio of 14.3x, making it safe overall.

What stands out about Total compared to its peers is its relatively low payout ratio (in comparison). There are few companies that can safely pay a 6% dividend yield. Total SA is one of them.

Investors will also benefit from the company’s growing production. Through the first 3 quarters of fiscal 2015, Total SA has increased its production by 11% versus last year.

A conservative fair value estimate of Total SA’s dividend yield when oil price fears are not high is around 4%. This implies around 50% upside for Total SA shareholders at current prices.

The company will very likely see its dividend yield fall – and its price rise – once oil prices increase. In the meantime, investors will benefit from the company’s high 6% yield and growing production.

Eni SpA

Eni SpA is the largest corporation in Italy. The company is partially owned by the Italian government (~30%) and by the Chinese government (2%).

The company was originally founded in 1926 under the name Agip. In 1953 the company was reorganized into Eni by Enrico Mattei to be Italy’s national oil and gas company.

There is no need to speculate on whether or not Eni SpA will cut its dividend…

The company already has.

Eni SpA was the first (and possibly only) of the super majors to cut its dividend. The company reduced its interim dividend paid on September 23rd, 2015 from $0.56 to $0.40; a 29% reduction.

This is not the first time in recent history that Eni SpA has cut its dividend payments. The company reduced its dividend 23% in 2009 when oil prices collapsed.

Eni SpA’s management does not view the dividend as sacrosanct. Dividend payments are one of the first items on the chopping block when oil prices fall.

The company’s lack of commitment to its dividends makes the company a poor choice for investors seeking steady and/or rising income from their investments.

Summary of Results

Of the 6 oil and gas super majors, only Eni SpA has cut its dividend payments so far.

Of the 5 remaining super majors, Chevron is in the most precarious position. Chevron will likely be able to pay steady dividends in 2016 – even if oil prices average around $40/barrel through the year. Chevron may even do a paltry 1% or so dividend increase to keep its Dividend Aristocrat status.

Beyond 2016, the company’s ability to pay dividends becomes more suspect. Chevron cannot take on debt to pay its dividend indefinitely. At some point, the company will have to reduce its dividend. Based on its long dividend history and management’s commitment to the dividend, this will be a last resort – but it could happen if oil prices stay low for more than another year.

ExxonMobil, BP, and Total SA, and Royal Dutch Shell appear to have better cash flow producing abilities in the current low rate environment. It is likely these 4 super majors do not cut their dividends, even in an extended oil slump. Oil prices would have to stay depressed for years for these companies to cut their dividend. This assumes that managements will stick to their word and prioritize dividend payments.


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