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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Libya’s NOC says production to rise as it seeks to revive oil industry

Updated 22 September 2020

Libya’s NOC says production to rise as it seeks to revive oil industry

  • Libya produced around 1.2 million bpd – over 1 percent of global production – before the blockade
  • Libya’s return to the oil market is sustainable

LONDON: Libya’s National Oil Company said it expected oil production to rise to 260,000 barrels per day (bpd) next week, as the OPEC member looks to revive its oil industry, crippled by a blockade since January.
Oil prices fell around 5 percent on Monday, partly due to the potential return of Libyan barrels to a market that’s already grappling with the prospect of collapsing demand from rising coronavirus cases.
Libya produced around 1.2 million bpd — over 1 percent of global production — before the blockade, which slashed the OPEC member’s output to around 100,000 bpd.
NOC, in a statement late on Monday, said it is preparing to resume exports from “secure ports” with oil tankers expected to begin arriving from Wednesday to load crude in storage over the next 72 hours.
As an initial step, exports are set to resume from the Marsa El Hariga and Brega oil terminals, it said.
The Marlin Shikoku tanker is making its way to Hariga where it is expected to load a cargo for trader Unipec, according to shipping data and traders.
Eastern Libyan commander Khalifa Haftar said last week his forces would lift their eight-month blockade of oil exports.
NOC insists it will only resume oil operations at facilities devoid of military presence.
Nearly a decade after rebel fighters backed by NATO air strikes overthrew dictator Muammar Qaddafi, Libya remains in chaos, with no central government.
The unrest has battered its oil industry, slashing production capacity down from 1.6 million bpd.
Goldman Sachs said Libya’s return should not derail the oil market’s recovery, with an upside risk to production likely to be offset by higher compliance with production cuts from other OPEC members.
“We see both logistical and political risks to a fast and sustainable increase in production,” the bank said. It expects a 400,000 bpd increase in Libyan production by December.
The Organization of the Petroleum Exporting Countries and allies led by Russia, are closely watching the Libya situation, waiting to see if this time Libya’s return to the oil market is sustainable, sources told Reuters.