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.


S&P cuts Australia’s sovereign outlook, affirms AAA rating

Updated 08 April 2020

S&P cuts Australia’s sovereign outlook, affirms AAA rating

  • S&P affirmed Australia’s prized rating but said a downgrade was possible within the next two years
  • Australian long-dated bonds sold off after S&P’s outlook downgrade

SYDNEY: Global ratings agency S&P on Wednesday lowered its outlook on Australia’s coveted ‘AAA’ rating to “negative” from “stable” in anticipation of a “material” weakening in the government’s debt position as it splashes out a large fiscal stimulus package.
S&P affirmed Australia’s prized rating but said a downgrade was possible within the next two years if the economic damage from the COVID-19 outbreak is more severe or prolonged than it currently expects.
Australia is among a handful of countries in the world to boast the best ranking from all three major ratings agencies.
But it has come under a cloud as the pandemic has dealt Australia a severe economic and fiscal shock, with S&P predicting the A$2 trillion ($1.23 trillion) economy would plunge into recession for the first time in nearly 30 years.
This would cause a “substantial deterioration of the government’s fiscal headroom at the ‘AAA’ rating level,” S&P said in a statement.
Treasurer Josh Frydenberg said the outlook downgrade was “a reminder of the importance of maintaining our commitment to medium term fiscal sustainability.”
The government has pledged A$320 billion ($197.73 billion) in fiscal spending, or 16.4 percent of annual economic output, to backstop the economy and prevent a crisis as the pandemic shuts companies and leaves many unemployed.
Some fund managers said Wednesday’s outlook downgrade was unlikely to raise the government’s borrowing costs by much though it could hurt Australian companies whose ratings are dependent on the sovereign rating.
“A large proportion of credit funds are mandated to maintain funds in a specific ratings bucket,” said Asmita Kulkarni, Director Investment Strategy at FIIG.
“With potential widespread downgrades we could see funds being forced to sell-down investment which would result in a widening of credit spreads.”
Australian long-dated bonds sold off after S&P’s outlook downgrade with 10-year yields jumping to 0.967 percent from 0.909 percent at Tuesday’s close.
Economists said they do not expect a rating downgrade prior to the federal budget due on Oct. 6.
It was only in September 2018 that S&P upgraded Australia’s outlook to “stable” from “negative” as the budget came close to balance. The government had even projected a surplus for the current fiscal year and next.
While all those predictions are now under water, Australia’s public debt is still in good shape, S&P noted.
“While fiscal stimulus measures will soften the blow presented by the COVID-19 outbreak and weigh heavily on public finances in the immediate future, they won’t structurally weaken Australia’s fiscal position,” S&P said.
“This expected improvement is a key supporting factor of our ‘AAA’ rating.”