Oil prices have collapsed from highs of ~$120 per barrel to lows of ~$30 per barrel.
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 & gas industry - the 6 super major oil & gas corporations - are they also likely to cut their dividend payments?
The 6 super majors are listed below:
- BP Plc (NYSE:BP)
- Eni SpA (NYSE:E)
- Total SA (NYSE:TOT)
- Chevron (NYSE:CVX)
- Exxon Mobil (NYSE:XOM)
- Royal Dutch Shell (RDS.A, RDS.B)
Of the 6, Exxon Mobil is the largest. The image below shows the respective market caps of all 6 super majors to get an idea of their relative sizes.
The super majors all have enviable dividend yields - especially when compared to the S&P 500's current dividend yield of 2.2%.
- BP has a dividend yield of 7.8%
- Eni SpA has a dividend yield of 6.3%
- Total SA has a dividend yield of 6.0%
- Chevron has a dividend yield of 5.0%
- Exxon Mobil has a dividend yield of 3.7%
- Royal Dutch Shell has a dividend yield of 7.7%
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. Click here to see 12 quality high dividend stocks analyzed in detail.
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 is the second-largest super major, and has the second-lowest yield of the 6 at "just" 5.0%.
It is a Dividend Aristocrat (along with Exxon Mobil); Chevron has paid increasing dividends for 28 consecutive years. The image below shows the company's dividend history over the last 45 years.
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 its most recent earnings presentation shows:
The will to pay increasing dividends is very important for a company management. Without it, the dividend is one of the first capital outlays to be cut when times get tough.
During the financial crisis of 2007-2009, oil prices dropped precipitously. The company's earnings fell by 55%. Despite this, Chevron did not cut its dividend.
In 2015, it saw cash flow from operations decline:
- 2015 cash flow from operations of $19.5 billion
- 2014 cash flow from operations of $31.5 billion
Chevron paid out $8 billion in dividends in fiscal 2015 and ~$30 billion on capital expenditures. To make up for the difference in cash flow from operations and capital needs, the company divested assets and issued new debt.
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:
- Planned ~$4 billion in asset divestments
- Downstream net revenue of ~$10 billion
- Upstream revenue @ $30 oil prices of $29 billion
- Upstream revenue @ $40 oil prices of $38 billion
- Upstream revenue @ $50 oil prices of $48 billion
- Upstream revenue @ $60 oil prices of $57 billion
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:
- $8 billion shortfall at $40 oil prices
- $17 billion shortfall at $30 oil prices
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. It 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, company 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 it would eventually be unable to pay its dividend.
Exxon Mobil 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. Exxon Mobil and Chevron are the only two oil corporations that are also Dividend Aristocrats.
Exxon Mobil'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, Exxon Mobil is still profitable thanks to its diversified operations. The company's chemical and downstream operations generated $2.3 billion in profits in its most recent quarter. Even with ultra-low oil prices, Exxon Mobil'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:
Source: Exxon Mobil Q4 Earnings Presentation, slide 7
In total, Exxon Mobil 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 Exxon Mobil.
Company management is committed to paying rising dividends, as evidenced by its 33-year streak of consecutive dividend increases.
In addition, two out of Exxon Mobil's three segments (downstream and chemical) are generating significant cash flows.
Exxon Mobil 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. Exxon Mobil is one of only three United States corporations with an AAA rating from S&P. The other two are Microsoft (NASDAQ:MSFT) and Johnson & Johnson (NYSE: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 Exxon Mobil on a 90-day watch; the company may lose its perfect credit rating, but would still have an excellent credit rating nonetheless. This means it will have no difficulty tapping credit markets if it needs additional liquidity while oil prices remain low.
Exxon Mobil'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:
- A management willing to pay rising dividends
- Profitable operations that are nearly funding the dividend today despite extremely low oil prices
- Excellent credit ratings
Shareholders of Exxon Mobil should not worry about a potential dividend cut - with that said, dividend increases will likely be very small (in the 1-3% 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.
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.
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 & 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. Its 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.
BP was founded in 1909 as the Anglo-Persian Oil Company after a massive oil discovery in Iran. Today, it employs 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 about 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. It is expecting $17-19 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 the 4th quarter of 2015, the company will generate operating cash flows of around $23 billion in fiscal 2016 - around $3-5 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.
Its 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, it 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 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 fourth largest of the super majors, and currently offers investors a very high 6% dividend yield.
Like all oil companies, it 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:
- $3.60 in fiscal 2015
- $3.75 in fiscal 2016
It currently pays $2.64 a share in dividends. Total's payout ratio will remain well under 100% despite low oil prices.
The company'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. It 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 the company 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 the company'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 its high 6% yield and growing production.
Eni SpA is the largest corporation in Italy. The company is partially owned by the Italian government (~30%) and by the Chinese government (2%).
It 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 & gas company.
There is no need to speculate on whether or not Eni SpA will cut its dividend. It 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 it 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 Eni a poor choice for investors seeking steady and/or rising income from their investments.
Summary of Results
Of the 6 oil & 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. The company 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, its 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.
Exxon Mobil, BP, Total SA, and Royal Dutch Shell appear to have better cash flow producing abilities in the current low rate environment. It is likely these four 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.
Disclosure: I am/we are long XOM.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.