Big Oil may have to break dividend taboo as debt spirals

Chevron was the only one to reduce its debt last year. (Reuters/File)
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Updated 26 March 2020

Big Oil may have to break dividend taboo as debt spirals

  • Shell prides itself on not cutting its dividend since the 1940s, but some investors think that might soon change

LONDON: The world’s biggest oil and gas firms should break an industry taboo and consider cutting dividends, rather than taking on any more debt to maintain payouts as they weather the fallout from the coronavirus pandemic, investors say.

The top five so-called oil majors have avoided reducing dividends for years to keep investors sweet and added a combined $25 billion to debt levels in 2019 to maintain capital spending, while giving back billions to shareholders.

The strategy was designed to maintain the appeal of oil company stocks as investors came under increased pressure from climate activists to ditch the shares and help the world move faster toward meeting carbon emissions targets.

Now this strategy is at risk. Oil prices have slumped 60 percent since January to below $30 a barrel as demand collapsed because of the pandemic and as a battle for customers between Saudi Arabia and Russia threatened to flood the market with crude.

“Long term, it is appropriate to cut the dividend. We are not in favor of raising debt to support the dividend,” said Jeffrey Germain, a director at Brandes Investment Partners, whose portfolio includes several European oil firms.

The combined debt of Chevron, Total, BP , Exxon Mobile and Royal Dutch Shell stood at $231 billion in 2019, just shy of the $235 billion hit in 2016 when oil prices also tumbled below $30 a barrel.

Chevron was the only one to reduce its debt last year.

The latest collapse in oil prices has sent energy companies reeling, just as they were recovering from the last crash, which saw crude plummet from $115 a barrel in 2014 to $27 in 2016.

Companies from Exxon to Shell have announced plans to cut spending and suspend share buyback programs to balance their books and prevent already elevated debt levels from ballooning.

None has announced any plans to cut dividends so far.

Shell, which paid $15 billion in dividends last year, has never cut its dividend since the 1940s. This week it announced plans to slash capital spending by $5 billion.

But with the highest debt pile among rivals of $81 billion at the end of 2019 and an elevated debt-to-capital ratio, known as gearing, some investors say Shell might have to halve its dividend.

“The measures taken by Shell seem to be sufficient but, over time, if Shell (for instance) does not spend enough capital expenditure then production will start to fall and the underlying cash flow will not be sufficient to sustain the dividend long term,” said Jonathan Waghorn, co-manager of the Guinness Global Energy Fund.

Even if oil prices recover to the low $40s a barrel, oil majors’ debt would rise to levels that are too high by 2021, said Morgan Stanley analyst Martijn Rats.

“Much remains uncertain, but if commodity markets evolve as expected, we think European majors will start to reduce dividends in the second half of 2020,” Rats said.

BP, which last cut its dividend in the wake of the 2010 Deepwater Horizon rig explosion, has yet to announce a detailed plan to weather the crisis. BP declined to comment.

“Given all the negatives, I see no long-term downside to cutting the dividend temporarily and, once circumstances change, raise it accordingly,” said Darren Sissons, portfolio manager at Campbell, Lee & Ross, speaking about major oil companies.

The dividend yield — the ratio of the dividend to the share price — on oil company stocks has soared in recent weeks following the collapse in crude prices, hitting levels not seen in decades.

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Saudi Arabia raises more than SR15bn in bond sale

Updated 28 March 2020

Saudi Arabia raises more than SR15bn in bond sale

  • Gulf oil exporters are increasingly turning to debt sales to help fund spending in a low oil price environment

JEDDAH: Saudi Arabia has sold more than SR15 billion in Islamic bonds, as the Kingdom seeks to develop its local debt market.

The Kingdom’s Finance Ministry said on Friday that it had closed the book to investors on its March 2020 riyal-denominated sukuk program.

The total amount raised by the sukuk sale was SR15.568 billion, divided into three tranches that mature in five, 10 and 30 years.

Gulf oil exporters are increasingly turning to debt sales to help fund spending in a low oil price environment while at the same time developing their own capital markets as part of ongoing diversification reforms.

“The closure of the issuance of government bonds exceeding 15 billion riyals shows many positive elements,” said Abdullah Ahmad Al-Maghlouth, a member of the Saudi Economic Society. 

“Such as confirming the robustness of the Kingdom’s credit rating and the strength of the Saudi economy; that the Kingdom’s debt-to-GDP ratio is still far lower than many other G20 countries; the Finance Ministry’s ability to deal with the requirements of asset and liability management; as well as the Kingdom’s strong foreign-exchange reserves in dollars, among others.”

The Kingdom’s strong credit rating means it can borrow more cheaply than many other Mideast economies despite a weaker oil price.

Economic analyst Fahd Al-Thunayan said: “The Ministry of Finance, represented by the National Debt Management Center, continued its efforts in developing local debt markets and providing the required balance in financing public-budget expenditures, through the optimal mixture of the use of reserves and borrowing within the upper limits, like a percentage of the GDP, where the local issuances reached 65 percent of the total debt in the year 2019.”