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Exxon Mobil Corporation, Chevron Corporation, BP And Royal Dutch Shell Face Challenging Dividend Environment

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Bidness Etc sheds light on the challenges for companies like Exxon, Chevron, BP, Royal Dutch Shell, and Total SA in sustaining dividend payouts amidst depressed crude oil prices


Crude prices have dropped more than 50% since the highs of June last year, following weak Chinese demand and a global supply glut. Oil companies are already feeling the heat and it will be a challenge for them to maintain dividends in the current scenario.

What is more, the past week saw further deterioration in the market, and the West Texas Intermediate (WTI) plunged into the high 30s following the devaluation of the Chinese yuan. Monday, August 24 saw a global market sell-off and almost all major indexes declined.

The recent interest rate cut by China, however lent some stability to the markets, and crude prices also recovered marginally. During Asian trading on Friday last week, the WTI was down 0.56% at $42.32 per barrel, while the Brent was down 0.80% at $47.18 per barrel.

Energy Companies

Energy stocks have borne the brunt of the crude oil decline. Exxon Mobil Corporation (NYSE:XOM) stock has shed 25.57% in the last one year while Chevron Corporation (NYSE:CVX) has lost 40.77%. Meanwhile, BP plc (ADR) and Total SA (ADR) stock have lost 31.39% and 29.74%, respectively during the same period.

The upstream exploration and production (E&P) segment of these companies has been hit the hardest. The poor performance was reflected in second-quarter results for fiscal year 2015 (2QFY15, ended June 30, 2015). Crude traditionally has traded around $110 to $115 per barrel, and energy companies have largely focused on developing upstream operations. While downstream segments managed to offset some of the losses, the size of these segments was not large enough to fully sustain these oil giants.

Other Measures To Raise Cash

Energy companies are understandably reluctant to cut dividends as this can lead to a decline in investor confidence. In such a scenario, a lot of these companies have taken other measures to cope with the current low-oil-price environment.

Bidness Etc takes a look at the capital spending for Royal Dutch Shell plc. (ADR) (NYSE:RDS.A), BP plc. (ADR) (NYSE:BP), Total SA (ADR) (NYSE:TOT), Exxon and Chevron.

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As can be seen from the table above, all oil majors have cut capital expenditure to save cash and improve liquidity. Oil majors have also resorted to other sources of raising finances such as asset divestiture. The table below shows asset divestitures undertaken by oil majors from 2011 to 2014.

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Dividend Yield

The crude oil price decline has actually helped boost dividend yields. The table below shows the one-year forward dividend yields of Shell plc. BP plc, Total SA, Exxon and Chevron.

While a high dividend yield is usually a metric that makes a stock look attractive, it is not an effective measure in the case of energy companies, since it is just a reflection of falling stock price.

Dividend Coverage

Liquidity is off the essence in such an environment.  Companies have made massive cuts in capital spending and engaged in asset divestitures.

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Dividend ratio was calculated by dividing cash flow from operations (CFO) with the dividend. The table above shows that all the companies experienced a decline in their dividend coverage ratio except for Shell and Total. Following the rout in commodity prices, these companies may find it difficult to cover their dividends in the future.

The rise in Total’s dividend coverage can be associated with a massive decline in dividends in 2QFY15. The company made a quarterly dividend payment of $6 million only, down from $1.77 billion in the same quarter last year.

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All energy companies will now have to change focus. It seems unlikely that crude oil prices will rebound to $115 per barrel. OPEC continues to exceed 30 million barrels per daily, while US production is showing no signs of a slowdown either. Demand from China continues to stay low.

The main focus of these companies has always been to generate profits. However, the focus now should be cash preservation. Energy companies should also streamline their operations and maximize efficiency. It will be interesting to see whether these companies will be able to maintain dividends in the long run along and keep cash flows up.

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